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.
NAR chief economist Lawrence Yun saw some uneven trends in December’s report. “The supply limitation appears to be the main factor holding back contract signings in the past month,” he said. “Buyer interest remains solid, as evidenced by a separate Realtor survey, which shows that buyer foot traffic is easily outpacing seller traffic.”

Last month, the number of previously-occupied homes fell to an 11-year low, pushing down the completed sales numbers for December. But the broader trends remained stable. As the Associated Press reported, stable job gains and low mortgage rates have convinced more Americans to buy homes; completed sales of previously-occupied homes hit a five-year high in 2012. The low supply of existing homes has correspondingly helped home prices rise and made builders more inclined to ramp up construction. In December, builders started work on the most new homes in 4 ½ years.

Now, the association predicts that sales will increase by 9 percent this year.

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