Pending Home Sales Index Show Market Easing

December 7, 2005

WASHINGTON – The Pending Home Sales Index*, a leading indicator for the housing market, is trending lower, according to the National Association of Realtors®.

The index, based on contracts signed in October, dropped 3.2 percent to a level of 123.8 from a reading of 127.9 in September, and is 3.3 percent below October 2004; the current reading is the lowest since March of this year.

The index is based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, and the sale is usually finalized within one or two months of signing. David Lereah, NAR’s chief economist, said a decline was expected. “The drop in pending home sales is an affirmation that we are experiencing a modest slowing in the housing sector,” he said. “The index is pointing to a soft landing for home sales, which will help to correct the inventory shortages that have dominated housing over the last five years. This should restore balance to the market.”

A Pending Home Sales Index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed, and was the first of four consecutive record years for existing-home sales. Sales in 2001 were fairly close to the higher volume of home sales expected in the coming decade, well above the levels that were seen in the mid-1990s, so an index of 100 is considered to be historically strong.

NAR President Thomas M. Stevens from Vienna, Va., said it’s important to look at the index from a broader view. “The level of home sales activity remains quite strong from a historical perspective,” said Stevens, senior vice president of NRT Inc. “It’s unrealistic to expect continuous records or to sustain double-digit home price gains. People shouldn’t interpret a market that is returning to equilibrium as something that’s undesirable – this will be good for the long-term health of the housing sector by taking excessive pressure off of home prices.”

Regionally, the PHSI in the West rose 0.8 percent in October to 134.8, but was 2.0 percent below October 2004. In the South, the index was down 2.5 percent to 135.4 in October but was 1.2 percent higher than a year ago. The Midwest index dropped 6.3 percent to 112.2, and was 10.2 percent below October 2004. The index in the Northeast fell 6.9 percent to 101.8 in October, and was 6.4 percent lower than a year ago.

Source: The National Association of Realtors

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