The numbers: The index of pending home sales dropped 1.7% in October from the previous month, the National Association of Realtors reported Wednesday. The decline comes after both August and September saw upticks in pending sales thanks largely to the favorable mortgage rate environment.
The index captures transactions that have not yet closed but where a contract has been signed. As a result, the index is a leading indicator for the existing- and new-home sales reports in the coming months.
What happened: Sales fell in every region except the Northeast, the National Association of Realtors reported. The index declined most substantially in the West, followed by the Midwest and then the South.
Compared with a year ago, contract signings were up 4.4%. The index is benchmarked to contract-signing activity in 2001.
Big picture: The National Association of Realtors attributed the downturn in contract signings to two factors. Mortgage rates, while still low, increased in October. More notably though, a dearth of homes available for sale limited how many contracts could be signed.
The housing inventory situation will remain a major hurdle for the housing market and home-buyers alike moving forward. “We still need to address and, more importantly, correct inadequate levels of inventory across the country,” Lawrence Yun, the National Association of Realtors’ chief economist, said. “There is no shortage of buyers seeking homes, but a lack of available units continues to drag down the nation’s housing market and overall economy.”
Homebuilding data released in recent weeks suggested that builders are ramping up construction of new homes, which should alleviate the supply crunch. Nevertheless, Yun warned that the pace of building wasn’t quick enough to make up for the growth in population the U.S. will see over the next couple decades.
Furthermore, because pending home sales are a leading indicator, the index’s retreat in October could be a preview of a broader softening in the housing market.
Market reaction: The Dow Jones Industrial Average and the S&P 500 remained flat Wednesday morning amid a flurry of economic data releases including personal income, consumer spending and core inflation.