Low Supply Hampered Pending Home Sales in January, Down 2.8%

Washington, DC, February 27, 2017—The Pending Home Sales Index decreased 2.8% to 106.4 in January from an upwardly revised 109.5 in December 2016, according to the National Association of Realtors.

Although last month's index reading is 0.4% above last January, it is the lowest since then.

Insufficient supply levels led to a lull in contract activity in the Midwest and West, which dragged down pending home sales in January to their lowest level in a year.

Lawrence Yun, NAR chief economist, says home shoppers in January faced numerous obstacles in their quest to buy a home. "The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," he said. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago. Most notably in the West, it's not uncommon to see a home come off the market within a month."

According to Yun, interest in buying a home is the highest it has been since the Great Recession. Households are feeling more confident about their financial situation, job growth is strong in most of the country and the stock market has seen record gains in recent months. While these factors bode favorably for increased sales in coming months, buyers are dealing with challenging supply shortages that continue to run up prices in many areas.

"January's accelerated price appreciation is concerning because it's over double the pace of income growth and mortgage rates are up considerably from six months ago," said Yun. "Especially in the most expensive markets, prospective buyers will feel this squeeze to their budget and will likely have to come up with additional savings or compromise on home size or location."

Existing-home sales are forecast to be around 5.57 million this year, an increase of 2.2% from 2016 (5.45 million). The national median existing-home price this year is expected to increase around 4%. In 2016, existing sales increased 3.8% and prices rose 5.1%.

"Sales got off to a fantastic start in January, but last month's retreat in contract signings indicates that activity will likely be choppy in coming months as buyers compete for the meager number of listings in their price range," added Yun.

The PHSI in the Northeast rose 2.3% to 98.7 in January, and is now 3.6% above a year ago. In the Midwest the index fell 5.0% to 99.5 in January, and is now 3.8% lower than January 2016.

Pending home sales in the South inched higher (0.4%) to an index of 122.5 in January and are now 2.0% above last January. The index in the West dropped 9.8% in January to 94.6, and is now 0.4% lower than a year ago.