An index that is a gauge for future home sales dropped 3.2 percent in October to its lowest reading since March, the National Association of Realtors reported today.
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.”
The Pending Home Sales Index, based on contracts signed in October, fell to a level of 123.8 from a reading of 127.9 in September, and is 3.3 percent below October 2004, according to the announcement.
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.
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, the association reported.
Thomas M. Stevens, NAR president and senior vice president of NRT Inc., said, “The level of home sales activity remains quite strong from a historical perspective. 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 Pending Home Sales Index in the West rose 0.8 percent in October to 134.8, but was 2 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, the association reported.
The Pending Home Sales Index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 closely parallels the level of closed existing-home sales in the following two months.
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