Is This Report a Bad Sign For the Housing Recovery?

After reaching a 2 ½-year high last November, the number of pending home sales in the U.S. dropped in December because of a limited supply of available homes, a possible sign that sales of previously-occupied homes may continue to fall in the next few months.

On Monday, the National Association of Realtors announced that its seasonally adjusted index fell 4.3 percent last month to 101.7 from November’s record reading of 106.3. However, the results were not a complete step backward; December’s index reading was a 6.9 percent increase from the previous year, and for the past 20 consecutive months, pending home sales have stayed above their respective year-ago levels.

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The index is a forward-looking indicator for the housing sector, based on pending sales of existing homes. A sale is considered pending when the contract has been signed, but the transaction has not been closed. According to the NAR, the level of monthly sales-contract activity “parallels the level of closed existing home sales in the following two months.” An index reading of 100 is equal to the average level of contract activity during 2001, the first year pending sales were examined. Each month, the association compiles a measurement of contract activity that represents approximately 20 percent of the existing home sales.