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Pending home sales fall on declining home affordability
 
NAR: Contract signings reach lowest level since Dec. 2012
 
Kerri Ann Panchuk
 
October 28, 2013 10:00AM
 
The number of real estate contracts signed and recorded declined 5.6% from August to September, as home affordability receded under the influence of higher mortgage rates, home prices and consumer uncertainty, the National Association of Realtors concluded Monday.
 
The NAR Pending Home Sales Index – a barometer of real estate contract signings – fell from an index score of 107.6 in August to 101.6 in September. It also declined 1.2% from year ago levels when the index hovered at 102.8.
 
This is the lowest index level reached since December of last year, and NAR is blaming the influence of declining home affordability, lower consumer confidence and a government shutdown that shook up both construction activity and home sales.
 
"Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity," said Lawrence Yun, NAR’s chief economist. "In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases."
 
The numbers suggest a lackluster fourth quarter, with Yun saying for the first time in 29 months pending home sales failed to come in above year ago levels.
 
"This tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014," he said. "Even so, ongoing inventory shortages will continue to lift home prices, though at a slower single-digit growth rate next year."
 
Regionally, the pending home sales index fell the most in the Northeast, declining 9.6% to an index score of 76.7. The Midwest index declined 8.3% to 102.3, but remained 5.7% above year ago levels. The South also saw sales slip 0.4% to an index score of 116.2 even though the index is still 2% above year ago levels.
 
The West sales index fell 9% in September to an index score of 97.3, also down 9.8% from a year earlier. However, 2013 was a solid year for home sales overall. Numbers recorded in the first part of the year will make 2013 a high performing 12-month period overall.
 
NAR says total existing-home sales will end up 10% higher when compared to 2012 levels, with 5.1 million sales expected. This could even hold heading into 2014, the latest NAR report says.
Meanwhile, the national median existing-home price is expected to rise 11% to 11.5% for all of 2013, while experiencing a moderate 5% to 6% gain next year.

Home Sales, Prices Slowing in Bust-and-Boom Markets

The sharp home-price rally in some of the hardest-hit housing markets is likely to fade in the coming months amid a pullback in investor purchases and steady increases in the number of homes listed for sale.
 
Three markets in particular—Phoenix, Las Vegas, and Sacramento, Calif.—have witnessed surprisingly strong home-price inflation over the past 18 to 24 months.

For the three months ending in July, home prices rose 27.5% in Las Vegas from the previous-year period, according to the S&P/Case-Shiller index, the largest gain for any of the 20 cities in the index. Prices in Phoenix gained 18.9% from one year ago and 39.1% since September 2011, the best of any of the 20 cities in that span.

The rally began in early 2012 after investors aggressively bought up cheap foreclosed homes that can be rehabbed and flipped to end users or rented out to those who aren’t ready or able to buy, clearing an overhang of distressed properties. Meanwhile, many traditional buyers couldn’t sell their properties because they owed more than their homes were worth, keeping inventories very lean. As home prices warmed up and interest rates fell to rock-bottom levels, traditional buyers got in on the game, releasing pent-up demand.

Now, housing data is showing that the brakes could soon hit such sharp gains:

Phoenix: Investor purchases fell to 20% of sales in September, down from 29% a year earlier, and purchases by nine major institutional investors dropped to 110 sales, down 72% from 398 sales one year ago. Just four of the nine investors bought homes in September, compared with all nine one year ago. Second home purchases dropped by 23%, but purchases by owner-occupants increased by 21%, according to the Arizona Multiple Listing Service.
There were 2.5% fewer homes sold in September compared with a year earlier, even as the number of homes for sale increased by 9.4% over that span, according to the Arizona MLS. At the current pace of sales, Arizona had 3.7 months of supply, up from 3.5 months a year earlier.
One major bright spot: There are few signs of any shadow inventory of foreclosures hitting the Phoenix market. Distressed sales were down 59% from a year earlier.

Sacramento: The number of homes that sold in September fell by 6.8% from a year earlier, and the number that went under contract fell by 3.6%. Listings jumped by 40.3%, according to TrendGraphix Inc. Median prices rose by 1.2% from August and by 36.1% from one year earlier.

Las Vegas: The share of homes that sold in cash last month stood at 47.2%, down from 54.8% in August and one year ago, and down from a high of 59.5% in February, according to the Greater Las Vegas Association of Realtors. Many cash buyers tend to be investors.

Home sales were down 1.2% from a year earlier, even though there were more homes for buyers to choose from. The number of single-family homes listed for sale, at 14,659, stood 12.6% below last year’s levels, but the inventory of “non-contigent” listings—homes that don’t have any offers and aren’t under contract—was 60.5% above year-earlier levels. The median sales price in September fell for the first time in 19 months.

In Las Vegas, buyers earlier this year found themselves regularly losing out to investors amid tight supplies of homes for sale. Now, “the market is softening tremendously,” said Bryan Lebo, a local real-estate agent. “Buyers are becoming a lot pickier. They’re more patient.”
In some neighborhoods, he says, homes are now selling for 10% less than they were just a few months earlier, and builders are beginning to offer generous incentives, such as home upgrades to buyers and commissions to real-estate agents, in order to stay competitive.

Home construction spurs new jobs

Residential construction employment continues to outpace employment overall

What’s happening in housing is often an indicator of what’s happening in the economy. According to a report released today by the Department of Labor, the economy created 162,000 jobs in July, missing forecasted estimates. In other words, housing is helping jobs more than jobs are helping housing.

Trulia (TRLA) Chief Economist Jed Kolko noted that, despite a slow quarter for construction activity, residential construction employment continues to outpace employment overall. Year-over-year, residential construction is up 4.5% — ahead of overall national employment growth of 1.7% — an indicator that housing is putting more jobs on the market.

From its previous peak, construction employment is down 38%, while construction activity has dropped 56% from its previous peak.

However, job growth remains slugging for young adults, who are key to household formation, and job growth remains behind normal numbers in the metros that were hit hardest in the housing bust, aka the job market isn’t improving enough to give a strong boost to housing demand.

Only 75% of 25-34 year-olds are employed, remaining well below pre-bubble levels. In fact, this number is closer to the low point during the recession than to the pre-bubble normal of 78%-80%. So why are young adults struggling to find work?

Without jobs, young people are much more likely to live with their parents instead of becoming renters or homebuyers, which will continue to bring down the household formation numbers.

According to Sterne Agee chief economist Lindsey Piegza, most young adults are adjusting to their new surroundings and realizing that you can not simply buy a home with 0% down and no credit.

"Aside from the fact that that demographic that is coming out of college is struggling to find jobs in general, they're also struggling to find good paying jobs," Piegza noted.

Piegza added that it will likely be 5-6 years before those recent college grads are buying a house. "It's really important to recognize that the game has changed now," she said. Piegza believes that in the short term, this will add pressure on the housing market. However, she noted that in the long run, it will allow for a much more sustainable housing sector because we are putting people who can afford homes into homes instead of those who would be struggling to make payments.

In metros most clobbered by the housing crisis — aka metros with the biggest price declines during the bust and the highest vacancy rates now — job growth only reached 1.5% year-over-year in June, below the national job growth of 1.7% for the same period. Coincidentally enough, job growth is especially important for housing demand in these markets.

Piegza noted that these clobbered markets "have made vast improvements, but there's still quite a game of catch up."

According to Fannie Mae Chief Economist Doug Duncan, Friday’s report is consistent with modest economic growth of 1.4% through the first half of the year.

“The housing sector continues to outpace the broader economy, but signs of a temporary slowdown have appeared in recent data—likely induced in part by higher mortgage rates,” said Duncan.

“Despite these data, our July National Housing Survey, to be released next week, is expected to show that consumer expectations for healthy appreciation in home prices remain intact even amid expectations of higher mortgage rates in the future,” he added.

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