Pending home sales posted their first strong showing in three months in October, beating even the most optimistic of predictions.  The National Association of Realtors® (NAR) said its Pending Home Sales Index (PHSI) jumped by 3.5 percent compared to September, to a reading of 109.3.  The September index, originally reported at 106.0, unchanged from August, was revised down to 105.6.

The PHSI, a forward-looking indicator of existing home sales, is at its highest reading since June, but continues to run behind year-ago levels.  The October index was 0.6 percent below the same month in 2016.

Analysts polled by Econoday had expected the index to rise, but only by 0.6 to 2.5 percent.  The consensus estimate was 1.0 percent.

Lawrence Yun, NAR chief economist, says pending home sales in the South saw "a nice bounce back" after dual hurricanes in August and September and were the primary driver in the PHSI's increase.  However, he said, "Last month's solid increase in contract signings were still not enough to keep activity from declining on an annual basis for the sixth time in seven months. Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would-be buyers from reaching the market." 

The economist noted that homebuilders are trying to ramp up new home production in the face of labor shortages and cost challenges, but the supply and affordability problems continue.  The overall supply of homes drastically lags demand.  The inventory of available homes stood at 1.80 million at the end of October.

Adding to the problem, he said, was data from the 2017 Profile of Home Buyers and Sellers.  That NAR survey showed homebuyers typically living in their homes for 10 years, a survey record.  Prior to 2009 sellers remained in their homes for a median of six years before selling.                                          

"Existing inventory has decreased every month on an annual basis for 29 consecutive months, and the number of homes for sale at the end of October was the lowest for the month since 1999," said Yun. "Until new home construction climbs even higher and more investors and homeowners put their home on the market, sales will continue to severely trail underlying demand."

Pending home sales increased in three out of four regions, inching up 0.5 percent in the Northeast to 95.0. This lags the October 2016 rate by 1.9 percent.  The index in the Midwest was at 105.8, a gain of 2.8 percent but down 0.9 percent on an annual basis.  

The rebound cited by Yun carried pending sales in the South to 123.6 on NAR's index, up 7.4 percent from September and 2.0 percent higher than a year earlier. The index in the West decreased 0.7 percent in October to 101.6, and is now 4.4 percent below a year ago. 

Yun forecasts that existing-home sales will finish out the year at around 5.52 million, up from 5.45 million in 2016, and representing growth of 1.3 percent.  He expects the national median existing-home price to increase around 6 percent. In 2016, existing sales increased 3.8 percent and prices rose 5.1 percent.

The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

The index 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.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population.