Lack of Supply Thought to Cause Drop in Pending Home Sales

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Supply and demand are two basic economic factors that determine the market worth of just about any product or service. When it comes to real estate, supply and demand can affect the value and price of a home, but it can also have major implications for the overall economy. Until recently, the real estate market was flooded with homes - many of which were foreclosed, in short sale or abandoned. Now, however, it seems the tides have turned as demand has shot up but property owners remain hesitant to list their homes on the market. Many experts say this dwindling level of supply has caused pending home sales to drop. 

According to a recent press release from the National Association of Realtors, February's Pending Home Sales Index dipped 0.4 percent to 104.8 from a downwardly revised 105.2 in January. Despite the slight decrease, the index remains higher than last year's level of 96.6. 

Before January, the last time the index showed a higher reading was in April 2010 when it was 110.9, shortly before the deadline for the home buyer tax credit, the NAR reports. 

So while inventory remains tight, we're still better off than where we were before; however, experts say that more homes will need to be released in order for the market to maintain sustainable growth. The most effective way to make this happen, according to some, is to rev up new home construction. 

"Only new home construction can genuinely help relieve the inventory shortage, and housing starts need to rise at least 50 percent from current levels," said Lawrence Yun, NAR chief economist. "Most local home builders are small businesses and simply don't have access to capital on Wall Street. Clearer regulatory rules, applied to construction loans for smaller community banks and credit unions, could bring many small-sized builders back into the market."

PHSI by Region:

  • South - 118.8
  • Midwest - 103.6
  • West - 101.4
  • Northeast - 82.8

Regionally, the PHSI declined 2.5 percent to 82.8 in the Northeast, but remains higher than 2012 levels. The index for the Midwest increased 0.4 percent to 103.6 and is 13.2 percent higher than a year ago. The PHSI in the South fell 0.3 percent to 118.8 but is 12.1 percent above last year's figure. In the West, the PHSI increased 0.1 percent to 101.4 but is 0.8 percent below a year ago.

As for future predictions, Yun anticipates pending home sales to increase about 7 percent in 2013 to roughly 5 million sales, which is close to the current level of activity. 

"The volume of home sales appears to be leveling off with the constrained inventory conditions, and the leveling of the index means little change is likely in the pace of sales over the next couple months," said Yun.

For more information, please read the original NAR news release here:

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