Pending Home Sales increased by 44.3% in May, registering the highest month-over-month gain in the index since the National Association of Realtors (NAR) started tracking this metric in January 2001. So, what exactly are pending home sales, and why is this rebound so important?
According to NAR, the Pending Home Sales Index (PHS) is:
“A leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.”
In real estate, pending home sales is a key indicator in determining the strength of the housing market. As mentioned before, it measures how many existing homes went into contract in a specific month. When a buyer goes through the steps to purchase a home, the final one is the closing. On average, that happens about two months after the contract is signed, depending on how fast or slow the process takes in each state.
Why is this rebound important?
With the COVID-19 pandemic and a shutdown of the economy, we saw a steep two-month decline in the number of houses that went into contract. In May, however, that number increased dramatically (See graph below):This jump means buyers are back in the market and purchasing homes right now. Lawrence Yun, Chief Economist at NAR mentioned:
“This has been a spectacular recovery for contract signings and goes to show the resiliency of American consumers and their evergreen desire for homeownership…This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”
But in order to continue with this trend, we need more houses for sale on the market. Yun continues to say:
“More listings are continuously appearing as the economy reopens, helping with inventory choices…Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.”
As we move through the year, we’ll see an increase in the number of houses being built. This will help combat a small portion of the inventory deficit. The lack of overall inventory, however, is still a challenge, and it is creating an opportunity for homeowners who are ready to sell. As the graph below shows, during the last 12 months, the supply of homes for sale has been decreasing year-over-year and is not keeping up with the demand from homebuyers.
If you decided not to sell this spring due to the health crisis, maybe it’s time to jump back into the market while buyers are actively looking for homes. Let’s connect today to determine your best move forward.
Earlier this week, we discussed how most projections from financial institutions are calling for a quick V-shaped recovery from this economic downturn, and there’s research on previous post-pandemic recoveries to support that expectation.
In addition, we noted how there are some in the business community who believe we may instead be headed for a U-shaped recovery, where the return to previous levels of economic success won’t occur until the middle of next year. Yesterday, Reuters released a poll of U.S. and European economists which revealed that most surveyed are now leaning more toward a U-shaped recovery.
Why the disparity in thinking among different groups of economic experts?
The current situation makes it extremely difficult to project the future of the economy. Analysts normally look at economic data and compare it to previous slowdowns to create their projections. This situation, however, is anything but normal.
Today, analysts must incorporate data from three different sciences into their recovery equation:
1. Business Science – How has the economy rebounded from similar slowdowns in the past?
2. Health Science – When will COVID-19 be under control? Will there be another flareup of the virus this fall?
3. Social Science – After businesses are fully operational, how long will it take American consumers to return to normal consumption patterns? (Ex: going to the movies, attending a sporting event, or flying).
The challenge of accurately combining the three sciences into a single projection has created uncertainty, and it has led to a wide range of opinions on the timing of the recovery.
Right now, the vast majority of economists and analysts believe a full recovery will take anywhere from 6-18 months. No one truly knows the exact timetable, but it will be coming.
A big challenge facing the housing industry is determining what impact the current pandemic may have on home values. Some buyers are hoping for major price reductions because the health crisis is straining the economy.
The price of any item, however, is determined by supply and demand, which is how many items are available in relation to how many consumers want to buy that item.
In residential real estate, the measurement used to decipher that ratio is called months supply of inventory. A normal market would have 6-7 months of inventory. Anything over seven months would be considered a buyers’ market, with downward pressure on prices. Anything under six months would indicate a sellers’ market, which would put upward pressure on prices.
Going into March of this year, the supply stood at three months – a strong seller’s market. While buyer demand has decreased rather dramatically during the pandemic, the number of homes on the market has also decreased. The recently released Existing Home Sales Report from the National Association of Realtors (NAR) revealed we currently have 3.4 months of inventory. This means homes should maintain their value during the pandemic.
This information is consistent with the research completed by John Burns Real Estate Consulting, which recently reported:
“Historical analysis showed us that pandemics are usually V-shaped (sharp recessions that recover quickly enough to provide little damage to home prices).”
What are the experts saying?
Here’s a look at what some experts recently reported on the matter:
“Supported by our analysis of home price dynamics through cycles and other periods of economic and housing disruption, we expect home price appreciation to decelerate from current levels in 2020, though easily remain in positive territory year over year given the beneficial factors of record-low inventories & a historically-low interest rate environment.”
“The fiscal stimulus provided by the CARES Act will mute the impact that the economic shock has on house prices. Additionally, forbearance and foreclosure mitigation programs will limit the fire sale contagion effect on house prices. We forecast house prices to fall 0.5 percentage points over the next four quarters. Two forces prevent a collapse in house prices. First, as we indicated in our earlier research report, U.S. housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand. Price growth accelerates back towards a long-run trend of between 2 and 3% per year.”
“The housing supply remains at historically low levels, so house price growth is likely to slow, but it’s unlikely to go negative.”
Even though the economy has been placed on pause, it appears home prices will remain steady throughout the pandemic.
With businesses starting to slowly open back up again in some parts of the country, it’s important to understand how housing can have a major impact on the recovery of the U.S. economy. As we’ve mentioned before, buying a home is a driving financial force in this process. Today, many analysts believe one of the first things we’ll be able to safely bring back is the home building sector, creating more jobs and impacting local neighborhoods in a big way. According to Robert Dietz in The Eye on Housing:
“The pace of new home sales will post significant declines during the second quarter due to the impacts of higher unemployment and shutdown effects of much of the U.S. economy, including elements of the real estate sector in certain markets. However, given the momentum housing construction held at the start of 2020, the housing industry will help lead the economy in the eventual recovery.”
The National Association of Home Builders (NAHB) notes the impact new construction can have on the job market:
“Building 1,000 average single-family homes creates 2,900 full-time jobs and generates $110.96 million in taxes and fees for all levels of government to support police, firefighters and schools, according to NAHB’s National Impact of Home Building and Remodeling report.”
These employment opportunities, along with the home purchase, drive the economy in a major way. The National Association of Realtors (NAR) recently shared a report that notes the full economic impact of home sales. This report summarizes:
“The total economic impact of real estate related industries on the state economy, as well as the expenditures that result from a single home sale, including aspects like home construction costs, real estate brokerage, mortgage lending and title insurance.”
Here’s the breakdown of how the average home sale boosts the economy:As noted above in the circle on the right, the impact is almost double when you purchase new construction, given the sheer number of workers it requires to design, build, equip, and finalize the sale of the home. The NAHB paints a clear picture of these roles:
“The NAHB model shows that job creation through housing is broad-based. Building new homes and apartments generates jobs in industries that produce lumber, concrete, lighting fixtures, heating equipment and other products that go into a home remodeling project. Other jobs are generated in the process of transporting, storing and selling these products.
Additional jobs are generated for professionals such as architects, engineers, real estate agents, lawyers and accountants who provide services to home builders, home buyers and remodelers.”
The same NAR report also breaks down the average economic impact by state:On an emotional level, what’s most important for today’s consumers to feel confident about is the safety component that goes into the process. Mitigating the risk of essential personnel at this moment in time is more crucial than ever as we all aim to reduce the spread of the coronavirus. Fortunately, the NAHB has put immense effort into a plan that prioritizes the health and safety of home builders and contractors:
“This is why NAHB and construction industry partners have developed a Coronavirus Preparedness and Response Plan specifically tailored to construction job sites. The plan is customizable and covers areas that include manager and worker responsibilities, job site protective measures, cleaning and disinfecting, responding to exposure incidents, and OSHA record-keeping requirements.”
Buying a home is a substantial economic driver today, and when new construction picks back up again, it will be an even stronger recovery force throughout the country. If you’re in a position to buy a home this year, you can have a significant impact on your local neighborhoods and safely make the move you’ve been waiting for. It’s a win-win.