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Why did pending home sales rebound after a slow start to 2014?

Pending 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 (the NAR). It 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 real estate market’s health. 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.

Pending Home SalesEnlarge Graph

Highlights from the report

The Pending Home Sales Index (the PHSI), a proprietary index from the National Association of Realtors based on contract signings, rose 3.4%, to 97.4 in March from 94.2 in February. The index was 7.9% lower than March 2013. Poor weather and decreasing affordability have been pushing sales lower.

The PHSI rose 1.4% in the Northeast, but it’s 5.9% above a year ago. In the Midwest, the index decreased .8% and is 10.1% below a year ago. The South rose 5.6%, while the West Coast increased 5.7% and is down over 11% from a year ago. NAR is forecasting existing home sales of 4.9 million in 2014 with price increases of 6% to 7%. This is a revision downward in existing home sales and an increase in expected price appreciation from a month ago.

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 focusing more on the move-up buyer. Until recently, the move-up buyer was more or less stuck because of negative equity, or a complete lack 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.

A combination of higher borrowing rates and limited supply has made the first-time homebuyer pull back from the market. Pretty much every homebuilder, from PulteGroup (PHM), D.R. Horton (DHI), Lennar (LEN), and Ryland (RYL) have noticed declines in traffic. We will hear from Toll Brothers (TOL) soon and hope to get a look at the luxury end of the market. Given that builders have been increasing average selling prices by building bigger homes, the luxury end has been performing the best.

To learn more about important releases that affect your real estate investments, check out Market Realist’s Real Estate page.

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