The spring recovery in home sales gained further ground in May. Signed contracts to buy existing homes surged 6.1 percent from April, as home prices began to ease slightly. This is the largest monthly gain since April 2010, just before the end of the popular first-time home buyer tax credit.
The National Association of Realtor’s index of pending sales for existing homes rose 6.1% in May, the largest growth in four years and hit the highest level in eight months. Pending sales typically close within two months and the gauge is closely correlated with actual sales.
For months prominent economists have expected low mortgage rates to support sales. But cheap loans weren’t enough, especially as home prices continued to climb. It took a greater number of homes on the market as well as stronger jobs growth to prompt more deals.
Despite the monthly gain, the so-called Pending Home Sales Index from the National Association of Realtors is down 5.2 percent from May of 2013. Sales likely benefited from slightly lower mortgage rates. Rates have been expected to rise, as the Federal Reserve continues to scale back its purchases of mortgage-backed securities. Other economic factors, however, including volatility in overseas markets, have kept interest rates low. In June, the average rate on the 30-year fixed mortgage has largely been lower than it was a year ago, the first time that has happened since the rate surge in May and June of 2013.
Although pending sales have risen three months in row, first-quarter closings were weak enough that NAR expects them to drag down 2014’s total sales tally below last year’s result. In May the pending-sales gauge was down 5.2% from a year earlier. By region, May’s gauge of pending home sales rose 8.8% in the Northeast, 7.6% in the West, 6.3% in the Midwest and 4.4% in the South. Pending sales typically close within two months. An index reading of 100 equals 2001’s average contract activity level.
“Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” said Lawrence Yun, chief economist for the Realtors. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”
The gain exceeded the most optimistic estimate in a survey of economists, whose median forecast called for a 1.5 percent gain. Housing demand is benefiting from cheaper borrowing costs, a stronger employment outlook and easier access to credit for some households. At the same time, higher prices and limited income gains are keeping the improvement in the residential real estate from becoming more broad-based.
“Housing is beginning to bounce back,” Paul Ashworth, chief U.S. economist at Capital Economics Ltd. in Toronto, whose forecast for a 4 percent gain was the highest in the survey. “Mortgage rates have backed down a bit recently. Home prices are still rising, which means fewer people have mortgages that are under water. The longer the housing recovery goes on, the more people will gain confidence to join in.”
Closed sales of both new and existing homes rose strongly in May as well. The pending sales for May are an indicator of closed sales for May and June, depending on closing times. Closings have been speeding up of late, as mortgage lenders are no longer swamped with refinance business, due to the low rates. Mortgage refinance volume is less than half of what it was a year ago. The Realtors expect total sales in 2014 to fall nearly 3 percent short of 2013 levels.