Pending home sales fell for the second month in December and are finishing up the year well below their December 2020 level. The National Association of Realtors® (NAR) said its Pending Home Sale Index (PHSI) was down 3.8 percent from November and is 6.9 percent below its level at the end of the prior year. Pending sales had declined 2.2 percent in November.

The PHSI, which is based on signed contracts for the purchase of pre-owned single-family houses, townhomes, condos, and cooperative apartments, dipped from 122.4 in November to 117.7. An index of 100 is equal to the level of contract activity in 2001.

Analysts polled by Econoday had expected the index to rise 0.6 percent. Those polled for Trading Economics were closer to the mark with a consensus of an 0.2 percent decline. It was an unusually large gap between the two forecasts which are typically nearly identical.

“Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options,” said Lawrence Yun, NAR’s chief economist. “Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers.”

Even with December’s slowdown in transactions, Yun says last year was an overall great period for housing in terms of sales and price appreciation. “The market will likely endure a minor reduction in sales as mortgage rates continue to edge higher,” he added. He forecasts the 30-year fixed mortgage rate to jump to 3.9 percent by the fourth quarter.

Yun expects housing inventory to grow, largely due to increase building activity. Residential construction increased for the third straight month in December and there is now a six-month supply of new homes. He forecasts that housing starts will rise to 1.65 million units this year from an estimated 1.595 starts in 2021.

A larger inventory should contribute to slower home price growth and Yun expects existing home sales to slow by 2.8 percent and the appreciation rate to drop to 5.1 percent this year. The supply of existing homes, however, fell again in December, to an all-time low. There were only 910,000 homes available for sale, a 1.8-month supply.  

The PHSI declined in all three regions on both a month-over-month and an annual basis in December. In the Northeast, the index fell 1.2 percent to 98.2, a 10.5 percent decline from a year earlier. In the Midwest, the index dropped 3.7 percent and 1.2 percent from the two earlier periods.

Pending home sales transactions in the South slid 1.8 percent to an index of 145.2 and lagged the prior December by 3.9 percent. The index in the West decreased 10.0 percent for the month and the index of 95.0 was down 16.2 percent year-over-year.

The NAR’s PHSI is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months. Existing home sales numbers for January will be released on February 25.