July Pending Home Sales in Steepest Drop So Far This Year

08/28/2013 By: Mark Lieberman, Five Star Institute Economist

Responding to higher mortgage rates and higher prices, the National Association of Realtors’ (NAR) Pending Home Sales Index (PHSI) slipped 1.3 percent in July—the steepest decline this year—to 109.5, the group reported Wednesday. Economists had expected the index for July would drop to 109.8, which would have been a 1.0 percent decline from June’s 110.9. The June index was unchanged.

The index covered the same month in which new home sales, reported last week by the Census Bureau and HUD, plunged 13.4 percent to a seasonally adjusted sales pace of 394,000, the lowest rate of the year. Like the PHSI, new home sales are tracked when buyers sign contracts. The existing-home sales report, also a product of NAR, is based on closed transactions. Although the group downplays monthly price changes when it reports closings, NAR economist Lawrence Yun cited higher prices as affecting new contracts.

“Higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West,” Yun offered as an explanation for the drop in the PHSI. The Case-Shiller Home Price Indices for June, reported Tuesday, rose 2.2 percent to their highest levels in almost five years.

Increasing rates and prices, though, could also serve as a catalyst for contracts and sales as buyers rush to lock in prices or rates before they go higher.

The drop in the July PHSI was the second monthly decline, the first time the index has fallen for two straight months since last November and December. At 109.5, the index is at its lowest level since April. The PHSI is considered an indicator of home sales (closings) reported by the NAR. Existing-home sales rose in July as the PHSI for May increased. Closings fell in June as the index for April fell. With the month-over-month decline, the PHSI is up 6.7 percent over July 2012—the 27th straight month of annual increases, but the weakest 12-month increase since December, when the index was up 6.5 percent year-over-year. New home sales have been up on a yearly basis for 22 straight months and in 25 of the last 27 months.

The index fell in June in three of the four Census regions, improving only in the South to 121.5, up 2.6 percent over June to and 7.7 percent in the last year. The index fell 6.5 percent in the Northeast to 81.5, 3.3 percent higher than July 2012. In the West, the index fell 4.9 percent in July to 108.6, 0.4 percent below July 2012. The index dropped 1.0 percent to 113.2 in the Midwest in July, 14.5 percent higher than last year.

The PHSI, the NAR said, is based on a sample of about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, the base year.

Hear Mark Lieberman Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:20 a.m. Eastern