Remarkable Spike in Pending U.S. Home Sales

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The Pending Home Sales Index made a rousing 44% increase in the month of May, after two months of rating decline from the Coronavirus pandemic.

According to the Trading Economics Research Forum, the Housing Index was supposed to experience a negative growth rate from this time last year of 16.2%.

In a spectacular development, housing contracts massively rallied with a year on year growth rate of negative 5.1%.

Home Sales Chart Internet Bull ReportAccording to the National Association of Realtors, the national PHSI increase surpassed economists’ recovery expectations by over two-fold.

Chief NAR economist Lawrence Yun optimistically remarked, “This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership”.

With the development of a housing contract increase, the NAR expects existing-housing sales to hit 4.93 million units and new-housing sales to reach 690,000 units.

The Pending Home Sales Index grew by 44.3% from the month of April to 99.6 as a national average. Year over year contract signings fell 5.1%. By region, the South showed a strong overall performance with the highest yearly growth index and impressive monthly growth at 43.3%.

The Northeast saw the second-highest monthly growth of its index at 44.4 %; however, it experienced a massive decline of 33.2% from this point last year. Pending house sales grew by 37.2% and 56.2% in the West and Midwest, respectively, yet they suffered declines of 2.5% and 1.4% from the year prior.

45 of the 50 metropolitan housing markets now stand above the recovery trend, which sits above the January 2020 average for regional home sales.

Home search activity in the most and least recovered urban areas had 12 and 22 percent year on year growth annually.

Among the strongest metropolitan areas for home sales lie cities concentrated in the South and West.

The cities with highest home contract sales include Houston, Riverside, Miami, and Sacramento, with indexes ranging from 128.5 to 143.5.


Home Sales Internet Bull Report

The growth of signed contracts is a result of increased listings appearing in urban centers around the nation. Yun noted that the growth of listings might be attributed to the reopening of the economy.  However, he notes that an increase in construction is necessary to better the long-standing trend of house underproduction.

The Pending Home Sales Index is regarded as the chief index of real estate market strength.

Speculators often regard the majority of labor from all parties involved in selling a home to come from signed housing contracts. Even though not all signed housing contracts result in closing sales, the PHSI is the most accurate measure of housing sales for one to two months in the future.

The baseline PHSI and housing volume are determined from measured levels in 2001: the PHSI was 100.0 nationally and the housing volume was between 5-5.5 million units. Therefore, any measurements at or above these levels are considered to be healthy for the housing market in any given year.

The index draws from a large sample, measuring about 20% of existing-home sale transactions. Demonstrations have indicated that the number of home sale contracts moves in tandem with the number of closed home sales.

Despite the promising demand for housing in the market, the fact of matter is that the supply of housing is not satisfactory to create equilibrium. Analysts as far back as January of this year, had indicated that any accommodation of the surge in housing demand would require about an increase in inventory by 3.8 million units.

According to Federal Reserve Economic Data, housing inventory stands at 1.55 million units; this would reduce the supply needed in inventory by 150,000 units.

Nonetheless, building 3.65 million houses is no small feat, and requires a rate of housing construction not witnessed in at least a decade.

This development begs the question, where does a housing market go, when it’s inventory supply does not meet the demand of it’s customers?

Average contract interest rates for 30-year fixed rate mortgages with baseline conforming loans (equal to $510,400 in the US for 2020) have remained under 3.5% since March, dipping to 3.29% as of the end of June.

Some economists have indicated that this imbalance would further create a drop in the housing market that will be felt in the latter half of the year.

However, with the maintenance of residential construction as an essential service, the trend of housing inventory increase, and gridlock of American housing consumption by ongoing quarantine orders, it is possible that housing price decline will perhaps be present going forward into the year.

The glut of housing will be unsustainable with increased supply to the high demand, and it is likely continued unemployment and wage decreases will accelerate the process of the housing market decline.

The importance of housing sales has to the overall American economy cannot be understated.

It is estimated that residential investment comprises between 3 and 5% of American GDP, whereas housing services (rent, bills, utilities) makes up about 12-13% of the GDP.

All in all, housing investment constitutes about one-fifth of American GDP; increases in housing contracts and subsequent service investment are certainly welcome developments.


Noah Hill

Equity Research Analyst

Noah Hill is a rising senior at Boston University, majoring in economics and minoring in computer science. Noah is passionate about data science, statistical analysis, and financial markets. As an active participant in the VentureCafe Initiative, Noah has associated himself with emerging leaders in the FinTech community, understanding both the passion and technology that drives the future of investment management/analysis. As a quantitative analyst in his Finance Club, he has collaborated to provide comprehensive investment strategies for a $650k student-run fund. With this background, Noah places an emphasis on statistical modelling and the impact of sentiment when deciding on an action to take with an equity. In his spare time, you can find Noah singing opera or reading up on political philosophy.