Pending home sales are a forward indicator of residential real estate sales
The National Association of Realtors, NAR, puts out the Pending Home Sales Index. 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. 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, is a proprietary index from the National Association of Realtors based on contract signings. It rose 6.1%, to 103.9 in May from 97.9 in April. The index was 6.9% lower than in May 2013. Rising home prices and rising mortgage rates have been affecting sales.
The PHSI rose 8.8% in the Northeast and is actually flat with a year ago. In the Midwest, the index rose 6.3% and is 6.6% below a year ago. The South rose 4.4%, while the West Coast increased 7.6% and is down over 11% from a year 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. 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, including PulteGroup (PHM), D.R. Horton (DHI), Lennar (LEN), and Ryland (RYL), has noticed buyer hesitation. Given that builders have been increasing average selling prices by building bigger homes, the luxury end has been performing the best. Investors who are interested in trading the homebuilding sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).
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