U.S. Pending Home Sales Fall but the Housing Market Is in Recovery Mode

The numbers: U.S. pending-home sales fell in May, the National Association of Realtors said on Thursday but the housing market is still showing signs of being in recovery mode.

Demand for homes is still strong, despite mortgage rates hovering near 7%, but buyers are finding few properties for-sale to choose from as homeowners hold out on selling.

The shortage in housing inventory has become so dire that it’s pushed pending home sales down in the spring, which is generally the peak season for home-buying.

Sales fell by 2.7% from the previous month, according to the monthly index released Thursday by the National Association of Realtors (NAR).

The figure fell short of expectations on Wall Street. Economists expected pending home sales to be flat in May.

Pending home sales reflect transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. Economists view it as an indicator for the direction of existing-home sales in subsequent months.

Big picture: Despite the headline figure revealing that home sales are down, the housing market isn’t in a crisis—it’s actually in recovery mode.

Considerable pent-up demand for homes from buyers who have accepted the new normal of high interest rates, combined with homeowners’ reluctance to sell their home and give up their rare pandemic-era ultra-low mortgage rate has led to an imbalance in demand and supply.

And unless mortgage rates rise significantly to scare off eager home buyers, or fall low enough to incentivize existing homeowners to sell, the housing market is likely to see this weird imbalance persist.

Builders, on the other hand, are taking the opportunity to offload their inventory as sales of new homes surge 12% in May.

What the realtors said: “Despite sluggish pending contract signings, the housing market is resilient with approximately three offers for each listing,” NAR Chief Economist Lawrence Yun said.

“The lack of housing inventory continues to prevent housing demand from being fully realized,” he added.

Yun suggested that existing-home inventory can be boosted with possible tax incentives, such as increasing the amount of capital gains that sellers can exclude on their taxes.

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