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Pending Home Sales Tank in November

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Pending home sales hit the lowest level in nearly five years in November, a sign that the US housing market will continue to get uglier in the near future.

Not too long ago, we reported that the air was starting to come out of housing bubble 2.0. As just one example, home sales in California hit the lowest level in a decade. And it’s not just California.

Now we’re seeing more signs of trouble. Pending home sales tanked in November, according to data released by the National Association of Realtors last week. The Pending Home Sales Index plunged 7.7% compared to November 2017, the biggest year-over-year percentage drop since June 2014.

All four US regions got whacked by year-over-year declines.

  • Northeast : -3.5%
  • Midwest: -7.0%
  • South: -7.4%
  • West: -12.2%

Pending home sales serve as a forward-looking measure. They reflect the number of contracts signed during the month. It generally takes one to two months for the sales to actually close. That means the pending sales numbers in November give a good indication of actual sales numbers in December and January.

The NAR report insisted there’s really nothing to worry about, but WolfStreet thinks there might be something to worry about.

The NAR did concede there are problems out west. The report blamed the declining sales in that region on an “affordability challenge.” Basically, the housing bubble is more pronounced in markets such as California and western Washington. As WolfStreet put it:

At some point, the market is going to run out of people with median incomes who are willing to stretch to the limit to buy a starter shack; and the market is going to run out of people with high incomes who are willing to stretch to the limit to buy a median house.”

But according to the NAR, the drops in other regions represent a “short-term pullback” that “does not yet capture the impact of recent favorable conditions of mortgage rates.”

In fact, the current mortgage rate of 4.94% is off the high of 5.17% in early November. That could be seen as a positive sign, and indeed that’s how the NAR spins it. But just looking at this small snapshot doesn’t tell the whole story, as WolfStreet points out.

In January 2018, when the Pending Home Sales index plunged to the lowest level since December 2015, the NAR blamed low supply of homes and surging mortgage rates. Since then, supply has sharply increased, and mortgage rates? Currently, the average 30-year fixed rate, at 4.94%, is still 54 basis points higher than it had been in January. And if an average mortgage rate of 4.4% was blamed for plunging home sales in January, then an average rate of 4.94% isn’t going to suddenly boost sales.”

And really, there is no reason to believe mortgage rates will continue to fall. The Fed nudged its funds rate up another 25 basis points in December and insists it will move ahead with two more hikes this year. We are in an environment of generally rising rates.

But the real problem is rising home prices. We have yet another asset bubble pumped up by nearly a decade of easy money. As WolfStreet put it, “There is a lot more at play here than just wobbling mortgage rates. At the top of the list are woefully inflated prices that potential buyers now see as such.”

And these potential buyers are now also confronting the fear that prices will decline, or further decline, after they buy. This is a scary thought, given the amount of leverage and the large dollar figures involved in a home purchase. Potential buyers now see that after the purchase, those fears could translate into some real and long-lasting headaches.”

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