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Pending home sales’ small surge in July point to how critical new home construction is

(ECONOMICS) Pending home sales surged in the West, primarily due to new home construction assisting affordability levels.

Pending home sales (contracts signed) rose 1.3 percent in July, and is now 1.4 percent higher than last year, hitting its second highest reading in over a decade, according to the National Association of Realtors® (NAR).

Sales fell in the Midwest, were relatively stagnant in the Northeast and South, but rose dramatically in the West by 7.3 percent, primarily due to new home construction.

Remember – it’s only when new home construction is firing on all cylinders that real estate functions properly. Construction brings inventory levels to a rate that supports affordability, attracting first time and repeat buyers.

What is behind the small surge?

Dr. Lawrence Yun, NAR chief economist, says a sizable jump in the West lifted pending home sales higher in July.

“Amidst tight inventory conditions that have lingered the entire summer, contract activity last month was able to pick up at least modestly in a majority of areas,” he said.

“More home shoppers having success is good news for the housing market heading into the fall, but buyers still have few choices and little time before deciding to make an offer on a home available for sale. There’s little doubt there’d be more sales activity right now if there were more affordable listings on the market.”

Adds Yun, “The index in the West last month was the highest in over three years1 largely because of stronger labor market conditions. If homebuilding increases in the region to tame price growth and alleviate the ongoing affordability concerns, the healthy rate of job gains should support more sales.”

A shift in the market

NAR points out that the size and costs of new homes has decreased in the past year, pointing to a shift away from big expensive homes targeting the upper end of the market. Dr. Yun observes that the focus is shifting toward buyers in the lower and middle price tiers.

“Realtors® in several high-cost areas have been saying for quite a while that there is robust demand for single-family starter homes and townhomes at an affordable price point for young buyers,” adds Yun.

“The homeownership rate won’t move up from its over 50-year low without a meaningful boost from first-time buyers, whose participation has yet to noticeably increase so far this year despite mortgage rates near all-time lows.”

The West led the charge this month

The PHSI in the Northeast moved up 0.8 percent to 96.8 in July, and is now 1.1 percent above a year ago.

In the Midwest the index decreased 2.9 percent to 105.8 in July, and is now 1.1 percent lower than July 2015.

Pending home sales in the South inched higher (0.8 percent) to an index of 123.9 in July and are now 0.4 percent higher than last July.

The index in the West surged 7.3 percent in July to 108.7, and is now 6.2 percent above a year ago.

#PHSI

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