The latest PHSI figures from the National Association of Realtors have shown a marked decline in new contract signings for December, 2012. The PHSI, or Pending Home Sales Index, is the NAR’s leading indicator of the future condition of the real estate market; it looks at all home sales contracts that have been signed but not closed. (Contracts typically take four to six weeks to close.) Overall PHSI trends are still positive with each month showing higher figures compared to a year ago for 20 consecutive months, but December, 2012 showed a 4.4% drop-off in signed contracts from the previous month (although still up 6.9% compared to December, 2011).
A Loss of Momentum
A downturn of 4.4% indicates “a loss of momentum in the signing of contracts to buy a home,” according to NAR chief economist Lawrence Yun. In spite of the overall positive market trends, Yun adds, December’s slow-down cannot be dismissed as a one-time statistical fluke, and has to be considered a “measurable decline.”
This sudden downturn is not due to a lack of buyers, however, but rather to a lack of inventory in certain key markets. Demand is high and buyer interest remains strong in the fourth quarter of 2012 and is set to continue in 2013. The latest Buyer and Seller Traffic Index from Realtors.org paints clear a picture of a seller’s market; buyer traffic outstripped seller traffic 56 – 38.
Decline in Inventory
The decrease in contract signings is not uniform across the country – three of the four major real estate markets have seen an increase in pending contracts from a year ago. December’s 4.4% decline is actually driven by one key region – the West, which comprises of real estate markets in Arizona, Nevada, California and Washington State. These regions, according to Yun, are suffering from an acute shortage of inventory. The double-digit growth in prices in the West compared to other regional markets reinforces the idea that it is a supply-constraint rather than a lack of demand that is the reason behind December’s slowdown.
Strong Demand + Low Inventory = Rise in Prices
Supplies of homes in the sub $100,000 range are especially low in the West. First time buyers are stuck with few options as demand for starter homes continues to grow, driving up prices. There is more movement at the higher end of the market, although the tight inventory means it is still very much a seller’s market.
This lack of inventory can also be seen in the local San Diego real estate market. The Californian real estate market rebounded earlier than other regions in 2012, seeing increased sales in the fourth quarter and a lower supply of available homes in December and beyond. Everyone who kept expecting a glut of bank owned property to flood the market with new inventory in 2013 are going to be disappointed; the banks report that they don’t have much inventory in the pipeline for California.
Although builders in Western markets are ramping-up housing-starts in 2013, they are doing so from a considerable deficit (due to severely diminished new-home construction in the wake of the 2006-2009 Depression). Even at the increased pace of construction, housing-starts are nowhere near enough to meet demand in California and other markets in the new year.
What to Expect in 2013?
Even with the ongoing inventory problems in certain regional markets, things are looking up in the real estate sector in 2013. Favorable affordability conditions in most regions combined with cheaper borrowing costs and more job gains will likely drive real-estate growth in the new year. Previously owned homes account for over 90 percent of the housing market, and NAR head economist Lawrence Yun expects the sale of these homes to go up 9 percent in 2013.
Home buyers who qualify for financing can take advantage of extremely competitive rates right now. Stats from Freddie Mac show that the average interest rate on a 30-year, fixed-rate mortgage in the last week of January 2013 was 3.42 percent; one of the lowest in the last 40 years.