Pending Home Sales Rise in July, but Inventory Challenges Could Limit the Housing Sector

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The numbers: The index of pending home sales rose 5.9% in July as compared with June, the National Association of Realtors reported Thursday.

It is the third consecutive month in which the level of Americans signing contracts to purchase homes has risen. Home sellers are going under contract in record time, the trade group reported.

Compared with a year ago, contract signings were up 15.5%. “We are witnessing a true V-shaped sales recovery as homebuyers continue their strong return to the housing market,” Lawrence Yun, the National Association of Realtors’ chief economist, said in the report.

The index measures real-estate transactions where a contract was signed for a previously-owned home but the sale had not yet closed, benchmarked to contract-signing activity in 2001.

What happened: Pending home sales increased across all parts of the country, led by a 25.2% gain in the Northeast. With demand for homes so high, properties are flying off the market. Nine contracts are being signed for every 10 new listings, Yun said.

The National Association of Realtors once again upgraded its forecast for home sales in 2020. The group now expects existing-home sales to increase to a pace of 5.8 million in the second half of the year. If that were to happen, the rate of sales for the entire year would be 5.4 million, which equates to a 1% gain from a year ago. Last month, the NAR projected that sales would drop in 2020 compared with the previous year largely because of the pandemic.

The big picture: Demand for homes is high right now. Pent-up demand caused by the delayed spring home-buying season has combined with new demand created by low mortgage rates and a desire among many Americans to move to the suburbs in search of more space as people continue to work and to educate their children from home.

“A primary factor in the housing market being spared so far is due to the concentration of unemployment in the service industries in which wages are often too low to support home ownership, as well as mortgage forbearance plans which have prevented current homeowners facing hardship from facing the prospect of selling to avoid foreclosure,” said Ruben Gonzalez, chief economist at Keller Williams.

However, the housing market does have one major headwind that will prevent sales volumes from hitting records: Inventory. The number of homes available for sale is historically low, and buyers can’t purchase what’s not for sale. Unless more people are inspired to put their homes on the market, the nation’s housing inventory will limit how far sales volumes can climb for the foreseeable future.

What they’re saying: “Housing is one area where the recovery has been extremely swift — pending sales already jumped above pre-COVID levels in June, while price trends have held firm. You will not find a post-war recession with this type of behaviour from such a cyclical sector — but this is no normal downturn,” Robert Kavcic, senior economist at BMO Capital Markets, wrote in a research note.

Market reaction: The Dow Jones Industrial Average and the S&P 500 both rose slightly in Thursday morning trading.

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