Real Estate

Pending home sales drop unexpectedly to lowest in a year, down 2.8% in January

Pending home sales down 2.8% in January

Higher mortgage rates and near record low supply resulted in disappointing home sales to start the year.

House hunters signed 2.8 percent fewer contracts to buy existing homes in January compared with December, although December's read was revised slightly higher, according to the National Association of Realtors. The group's so-called pending home sales index is now just 0.4 percent higher than January 2016, and this is the lowest reading since then. Pending home sales are an indicator of closed sales in February and March.

"The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," said Lawrence Yun, chief economist of the NAR. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago. Most notably in the West, it's not uncommon to see a home come off the market within a month."

Mortgage rates moved sharply higher after the presidential election and have remained elevated ever since. Home price gains continue to increase with the weaker supply, clearly weighing on affordability. Experts had expected a slight gain for pending home sales, as new supply was expected to come onto the market in January. The supply of homes for sale, however, is still down dramatically compared with a year ago, and demand for homes is rising as employment improves.

"January's accelerated price appreciation is concerning because it's over double the pace of income growth and mortgage rates are up considerably from six months ago," said Yun. "Especially in the most expensive markets, prospective buyers will feel this squeeze to their budget and will likely have to come up with additional savings or compromise on home size or location."

Regionally, pending home sales in the Northeast rose 2.3 percent month to month and were 3.6 percent above a year ago. In the Midwest sales fell 5.0 percent for the month and were 3.8 percent lower than January 2016. Pending home sales in the South gained only barely, up 0.4 percent for the month and up 2 percent for the year. The biggest drop was in the West where sales plunged 9.8 percent for the month and were 0.4 percent lower compared with a year ago.

Sales of newly built homes were disappointing in January, showing smaller-than-expected gains. New construction comes at a price premium to existing, and therefore higher rates have an outsized impact, given that affordability is already stretched. Builders continue to focus on the move-up and higher-end buyer, even though the highest demand is at the entry level. Builders say they cannot afford to put up entry-level homes right now, due to higher costs for land and labor.