Pending Home Sales Drop 8.7% in December, is Housing in Trouble?

by Peter Thomas Ricci

Last year closed out on a sour note for pending home sales, according to NAR’s final tally.

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Dec. 2013 was a rough month for pending home sales, with the Pending Home Sales Index dropping 8.7 percent from November to a reading of 92.4, according to the latest report by the National Association of Realtors.

That’s the lowest level for the Pending Home Sales Index since Oct. 2011, and in addition to its monthly declines, pending sales were down 8.8 percent from Dec. 2012.

Weak Pending Home Sales – What’s to Blame?

So, what’s to blame for the sizable drop in pending home sales? Lawrence Yun, NAR’s chief economist, said that several factors went into the lower numbers.

“Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers,” he said. “Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice.”

Indeed, the weather/inventory impediments seem to account for the lion’s share of the declines. As the Wall Street Journal‘s Nick Timiraos pointed out, pending sales declined the country over, including in housing markets not affected by weather.

Indeed, the numbers are quite striking: pending sales were down 10.3 percent in the Northeast, 6.8 percent in the Midwest, 8.8 percent in the South and 9.8 percent in the West, where sales were down a whopping 16.0 percent from last year (they were also down by yearly measures in the other three regions).

The Secret Ingredient to a Housing Slowdown

Though Yun’s analysis is sound, there is one dimension to the housing slowdown that he neglected to mention – rising mortgage rates. Take a look at this graph, which charts the Pending Home Sales Index through 2013:

Notice when the index began to falter? In May, when mortgage rates initially spiked. Pending home sale hit a six-year high that month, but as soon as rates increased, the effects on the housing market were immediate.

Does this mean the wild and crazy days of early 2013 are history? It’s still too early to say, but we’ll have to watch these numbers closely the next couple of months for any emerging trends.

For 2013, though, the data is quite clear – higher mortgage rates slowed the market.