The National Association of Realtors released some discouraging data today about the U.S. housing market. Its Pending Home Sales Index dropped a whopping 16% in November compared to October. It's still 15.5% higher than it was a year ago, but the month-over-month decline is troubling since the trend had been consistently positive for some time. I think there's reason to worry.
First, here's that trend over the past twelve months:
The chart shows how each month's index value changed versus the prior month. As you can see, it had been positive -- meaning the index had been increasing -- since February. This graphic also shows that the index fell off a cliff in November. And for anyone who wants to grumble about winter being a slow time for home sales: the index is already seasonally adjusted. On a non-seasonally adjusted basis, it would have decreased by 28%, not 16%.
There are a few things to consider when trying to determine what this drop in pending home sales means. Obviously, supply isn't exactly drying up -- there's still an awfully big housing inventory. So any change must be more demand driven.
The government home buyers credit should have some effect. You might recall that in early November the first time home buyers' credit was renewed through next April. At that time it was also expanded to include a smaller credit for most current homeowners. So even though homeowners were no longer rushing to buy a home before the credit would have expired in November, nothing really should have discouraged them from buying a home if they were already considering doing so. Indeed, for current homeowners, November marked the first month that Uncle Sam would give them a little gravy for taking the plunge.
Meanwhile, interest rates were also incredibly low during November -- sub-5% for nearly the entire month, according to Freddie Mac. When consumers can get more for their money, it's particularly surprising they'd be pulling back.
So while some of the decline might be blamed on demand relaxing and being delayed to early 2010 due to the credit's extension, I think a drop this big is still meaningful. If the index doesn't increase significantly through the first quarter from this level -- or actually continues to decline -- then I think you might be seeing the beginning of some home buying fatigue on the part of the American consumer. After all, there are only so many Americans out there who want to buy a home and have the savings and credit profile during this difficult time to do so.
If demand really has been exhausted, that's extremely bad news for the housing market. 2010 will likely see significant increases in mortgage rates, which will deter some potential homeowners. If that pool of perspective buyers turns out to be quite limited to begin with, we might see housing inventory begin to increase again significantly as foreclosures continue, and prices could plateau -- or even erase their 2009 gains.