The Number of Buyers Who Signed Contracts on Homes Plummeted in December Despite High Demand

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The numbers: The index of pending home sales decreased 4.9% in December from the previous month, the National Association of Realtors reported Wednesday.

The index reflects transactions where a contract has been signed but the sale has not yet closed. As a result, the index functions as an indicator for existing-home sales reports in the coming months. The index is benchmarked to contract-signing activity in 2001.

What happened: Compared with December 2018, contract signings were up 4.6% nationally, but pending sales volume was down on annual basis by 0.1% in the Northeast.

On a monthly basis, contract signings decreased in every region across the country, led by the South (down 5.5%), followed by the West (down 5.4%), the Northeast (down 4%) and the Midwest (down 3.6%).

Big picture: The drop in contract signings in December suggests that the existing home sales reports coming out in the near future likely won’t feature notable increases. While the drop in mortgage rates in the summer of 2019 provided a momentary lift for the housing market as it improved affordability for many buyers, the housing industry will struggle in 2020 with a depleted supply of homes for sale. Many real-estate experts expect this will curtail sales activity in the next year.

“The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market,” Lawrence Yun, chief economist for the National Association of Realtors, said in the report. “Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.”

What they’re saying: “Housing demand continues to gain traction owing to improved affordability, low borrowing costs, strong household balance sheets and elevated confidence. The issue for the housing sector these days is more about capacity… the paucity of homes for sale and workers to build new ones,” Michael Gregory, deputy chief economist at BMO Capital Markets, wrote in a research note.

Market reaction: The Dow Jones Industrial Average and the S&P 500 moved higher Wednesday morning as corporate earnings beats outweighed concerns about the coronavirus, though this trend did not extend to the 10-year Treasury yield, which dropped.

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