<

Pending home sales increase 6.7%, proof that hike in rates not affecting sales

Pending Home SalesEnlarge GraphPending home sales are a forward indicator of residential real estate sales

The Pending Home Sales index is put out by the National Association of Realtors (NAR) and tracks the number of home sales under contract. This tends to lead the actual home sales data by a few months. Home sales data is an indicator of the health of the real estate market. Recently, the market has been characterized by limited supply, as homeowners who aren’t desperate to sell have removed their properties in hopes of getting a better price. While the headline real estate appreciation numbers have been large, they’ve been concentrated primarily in the major West Coast markets, especially the markets hit the hardest in the downturn. The rest of the country has been experiencing low single-digit appreciation.

Highlights from the report

The Pending Home Sales Index (PHSI), a proprietary index from the National Association of Realtors based on contract signings, rose 6.7%, to 112 from 105.2 in April. The index was 12.1% higher than May of 2012 and marks the 25th consecutive month of year-over-year increases. This is the highest level since April 2010, just before the Home Buyer Tax Credit expired.

The PHSI was flat in the Northeast, but it’s 14.3% higher than a year ago. In the Midwest, the index jumped 10.2% and is 22% above a year ago. The South rose 2.8%, while the West Coast increased 16%, but due to lack of inventory, the West Coast is flat year-over-year. It appears things are starting to pick up in the previously sluggish Midwest. Total existing home sales are projected to increase 9% to 5.07 million homes. The median existing home price is forecast to increase 10% to nearly $195,000.

Implications for homebuilders

Given that the first-time homebuyer is still in a difficult financial situation with a weak job market and high student loan debt, homebuilders are focused more on the move-up buyer. Until recently, the move-up buyer was more or less stuck because of negative equity, or a complete dearth of entry-level homebuyers. With professional investors bidding up property, move-up buyers finally have an outlet for their current home. That said, the theme of the real estate market is still restricted supply. A lot of capital has been raised for rental properties, and sellers are noticing that prices are increasing again. The lack of existing homes for sale has helped create demand for new homes.

The return of the first-time homebuyer is the missing link to a more normal housing market. Household formation numbers have been depressed since the Great Recession began, as college graduates found it difficult to find jobs and moved back home. As the job market improves, the household formation numbers are increasing once again. Most of these people will be renters, at least to start. However, the rent-versus-buy difference is as skewed as it’s ever been in favor of buying. This pent-up demand will drive homebuilders, like Lennar (LEN), KB Homes (KBH), PulteGroup (PHM), Meritage (MTH), and Ryland (RYL), for years to come.