The Pending Home Sales Index Rises in May
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In a healthy real estate market, homes go up for sale, offers are made, and contracts are signed. To keep track of market activity, the National Association of Realtors (NAR) developed the Pending Home Sales Index, a tool that measures the number of signed real estate contracts on existing homes. According to the May findings, more and more home buyers are signing on the dotted line.
The Pending Home Sales Index reached 101.1 in May. Not only is this level up from 95.5 in April, it is 13.3 percent higher than May 2011, when the index rang in at 89.2. Every region of the country saw both monthly and yearly gains in the number of pending real estate contracts. This is the second time this year the index surpassed the 101 mark; in March, the index was 101.4.
This is the highest the index has measured since April 2010, when buyers were facing the home buyer tax credit deadline; home buyers looking to save money on their purchases rushed to sign contracts before the credit deadline. Today, with the tax credit incentive no longer a factor, the recent gains in the index could signal a strengthening housing market. The number of existing home contracts that have successfully closed was higher at the beginning of 2012 than in years past.
Based on this information, NAR economists expect 2012 sales figures to improve by 9 to 10 percent. Moreover, median existing home prices are expected to rise by 3 percent in 2012, followed by another 5.7 percent in 2013. Prices could increase even further if the demand for homes outstrips the supply. A decreasing inventory of homes on the market could increase prices by as much as 10 percent in the bidding process.
Housing affordability is currently at an all-time high, but a lack of inventory may be preventing many qualified home buyers from entering the market. Homeowners who find themselves in an underwater situation may be reluctant to list their homes, as the process of selling an underwater home is both lengthy and costly. If underwater homeowners won't sell, the solution to the shortage of homes on the market will come from new home construction. NAR economists predict housing starts to increase by 26 percent in 2012 and by 50 percent in 2013.
The recent increase in the Pending Home Sales Index is good news for the housing recovery, but the index could halt its upward momentum if there are no homes for buyers to purchase. If housing inventory matches demand, if credit conditions favor buyers, and if buyers have confidence in the market, the recent gains in the index could continue throughout the year.
