October pending home sales down, but remain at high level

Pending home sales fell slightly in October, dropping 1.1% month over month, according to the National Association of Realtors (NAR).

The decline brought the NAR’s Pending Home Sales Index (PHSI) to a reading of 128.9 in October; a reading of 100 is equal to the level of pending contract activity in 2001, when the index was benchmarked. 

Source: National Association of Realtors

Despite two straight monthly decreases, the NAR’s Pending Home Sales Index remained above pre-pandemic levels in October.

October marked the second straight month of decreases for the index, with three of the four major U.S. regions posting monthly drops in pending sales. Only the South, where the regional PHSI increased 0.1% month over month to a reading of 151.1, experienced growth from September to October. The PHSI in the West was unchanged at 116.8, while the regional indices in the Northeast and Midwest slid to 112.3 (down 5.9%) and 119.6 (down 0.7%), respectively.

Despite the drops, observers agreed that October’s data suggests enduring strength from the market. Indeed, year over year, contract signings are up 20.2%, with every region logging annual gains in pending sales activity.

“Pending home transactions saw a small drop-off from the prior month but still easily outperformed last year’s numbers for October,” noted Lawrence Yun, chief economist at the NAR.

“The robust year-over-year improvement in activity is a sign that we continue to see sustained demand for housing late into 2020,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. 

“October’s contract signings data are consistent with MBA’s data through November thus far, as purchase mortgage applications have shown strong annual gains for over six months, as well as record high loan sizes.”

The strong sales continue to negatively impact the inventory of homes for sale, which remains at historically low levels. Both Yun and Kan said that the ongoing shortage continues to present affordability challenges for buyers at the lower tiers of the market, especially first-time buyers.

“The combination of these factors – scarce housing and low rates – plus very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers, who don’t have the luxury of using housing equity from a sale to use as a down payment,” said Yun. “Work-from-home flexibility has also increased the demand for both primary and secondary homes.”