The National Association of Realtors pending home sales index tracks the number of existing homes that went into contract to be sold. When a home seller and buyer agree to the price and terms of a home sale, they sign a contract that outlines the transaction details and the property is said to be “under contract.” The home sale process is typically completed four-to-six weeks after the property goes under contract so the pending homes sales index is a leading indicator, or predictor, for the real estate market. An increase in the index reflects an increase in existing home sales while a decrease in the index reflects a decrease in existing home sales. It is important to point out that the index tracks existing home sales as opposed to new home sales, or homes that are recently constructed that have not been lived in previously. When people purchase a home they typically get a mortgage so the index also forecasts future activity in the mortgage market. The pending home sales index is released on a monthly basis and provides figures for the prior month.
In a positive sign for the real estate and mortgage markets, the pending home sales index report for February 2015 showed that pending home sales in January increased 1.7% on a month-over-month basis (as compared to December 2014). The increase in the index compares to a 3.7% decrease in the index reported for December and fell within the range of analyst expectations. The increase in the pending home sales index was driven by gains in the two largest housing regions, the South and the West while the Northeast was flat and the Midwest declined slightly. The February pending home sales index report is viewed as a mildly positive development in comparison to the mixed results from other housing and mortgage market reports such as the mortgage application index and new and existing home sales. (Source: Bloomberg)
What it Means for Mortgage Borrowers
The small uptick in the pending home sales report suggests that home purchase mortgage application activity should increase moderately over the next month as an increase in pending home sales typically translates into more mortgages for home buyers. The relatively small increase in the index, however, underscores the lack of momentum in the housing and mortgage markets. Many prospective home buyers have yet to take advantage of low interest rates while homeowners are staying in their homes longer which reduces the housing inventory available for sale and overall market activity. Market participation by first-time home buyers remains low and will need to significantly increase for the housing market to gain any sustained momentum. Many prospective first-time home buyers are overwhelmed by the mortgage process so we created our First-Time Home Buyer Mortgage Cheat Sheet to help them prepare for and better manage the process. We will continue to monitor the pending home sales index along with all the important housing and mortgage market metrics so stayed tuned to the FREEandCLEAR Blog for the latest news, insights and updates.
The FREEandCLEAR Mortgage Expert