A new pending home sales report has reignited fears of an impending housing market crash. Indeed, the mismatched housing market continues to have outweighed effects on demand.
What do you need to know about housing lately?
Well, per a new report, contract signings for existing homes have slowed to their lowest rate in more than 20 years in October. According to the National Association of Realtors (NAR) home sales under contract slipped 1.5% from the month prior, while on a yearly basis, pending transactions have dropped 8.5%.
This has left the Pending Home Sales Index (PHSI) at 71.4, the lowest number in the index’s history, dating back to 2001. For context, the PHSI is a “forward-looking indicator of home sales based on contract signings.” The base level of the index is 100, the rate of contract activity at the index’s origin.
As you might imagine, mortgage rates are the primary culprit behind the slip in pending sales.
“During October, mortgage rates were at their highest, and contract signings for existing homes were at their lowest in more than 20 years,” said Lawrence Yun, NAR’s chief economist.
“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied. Multiple offers, of course, yield only one winner, with the rest left to continue their search.”
What Does Falling Pending Sales Mean for a Potential Housing Market Crash?
Pending sales tell us largely what is already widely known: the demand for homes in the U.S. is rapidly deteriorating. Mortgage rates tipped past 7.5% in October, the highest since 2000. With the average price of homes still up compared to last year, home affordability is at something of a crisis level in many parts of the country.
The obvious question remains: why are home prices still up despite low demand? Well, this reflects the highly imbalanced state of the U.S. housing market. Indeed, the country has a very limited inventory of available homes for sale. The total housing inventory in the U.S. was 1,150,000 in October, less than half the U.S. average inventory from 1982 to 2023 of 2,282,880.
The limited supply of homes means even though demand for housing is in the gutters, home prices aren’t liable to fall by any notable amounts. Indeed, U.S. home prices are actually up 2.2% from the same time last year, while the number of homes sold is down nearly 7%.
As such, home construction has been a point of focus for the housing market. Yun had this to say on the matter:
“Sales for properties priced above $750,000 were higher than a year ago, because there is more inventory at this price point than what we saw last October. Additionally, newly built home sales are up 4.5% year-to-date due to homebuilders’ ability to create more inventory. It is vital that we continue to focus on boosting housing supply by all means in all corners of the country over the coming months.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.