January Pending Home Sales Rise to Highest Level in Nearly 3 Years

January Pending Home Sales Rise to Highest Level in Nearly 3 Years

02/27/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

The National Association of Realtors’ (NAR) Pending Home Sales Index (PHSI) rose 4.5 percent to 105.9 in January, its highest level in almost three years, NAR reported Wednesday. The monthly increase was the strongest since May, when the index rose 4.9 percent.

Economists had expected a 3.0 percent increase to 104.8 from December’s originally reported 101.7. The December index was revised down to 101.3.

The NAR report came one day after the Census Bureau and HUD jointly reported new home sales for January soared 15.6 percent—the strongest one-month gain in 20 years—to 437,000, the highest level since July 2008. Both the new home sales report and the PHSI are based on home sale contracts, not closings.

The PHSI is a supposed to be a leading indicator of completed transactions, but it’s not always an accurate predictor. The index rose in January, July, and October last year, but home sales (closings) fell two months later.

Despite the strong report, NAR chief economist Lawrence Yun remained cautious.

“Over the near term, rising contract activity means higher home sales, but total sales for the year are expected to rise less than in 2012, while home prices are projected to rise more strongly because of inventory shortages,” Yun said.

Indeed, the inventory of homes for sale dropped sharply in January, according to the NAR’s home sales report released last week, falling to 1,740,000—the lowest level since December 1999, when the inventory was 1,714,000. The months’ supply of homes for sale (computed against the sales pace) dropped to 4.2 months in January, the lowest since April 2005, when it was also 4.3.

The month-over-month trend in sales correlates inversely with the movement in the median price—that is, when the median price rises, sales dip, as happened four times in 2012; in the four months in which the median price dropped, sales rose. In January, the median price of an existing single family home fell 3.7 percent—the steepest one month drop in a year—and sales rose, albeit modestly, by 0.4 percent. The median price is at its lowest level since last March.

The PHSI in the Northeast rose 8.2 percent to 84.8 in January and is 10.5 percent higher than January 2012. In the Midwest, the index increased 4.5 percent to 105.0 in January and is 17.7 percent above a year ago. Pending home sales in the South rose 5.9 percent to an index of 119.3 in January and are 11.3 percent higher January 2012. In the West, the index edged up 0.1 percent in January to 102.1 but is 1.5 percent below a year ago.

The PHSI is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.

Hear Mark Lieberman Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 a.m. and again at 9:40 a.m. EST.

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