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Contract Signings Retreat, Not Enough Homes for Sale

February 25, 2021

Pending home sales dropped in January as inventory challenges continued to persist. Eager buyers are finding a lack of homes for sale. Contract signing fell 2.8% in January from December 2020, but is still 13% higher than a year ago, according to the National Association of REALTORS® reported Thursday.

NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, surged to a reading of 122.8 last month—an all-time high for January. (An index of 100 is equal to the level of contract activity in 2001.) All four major regions of the U.S. saw contract transactions increase year-over-year.

The monthly sales dip was more an indication of lack of homes for sale than home buyers retreating, NAR notes. “Pending home sales fell in January because there are simply not enough homes to match the demand on the market,” says Lawrence Yun, NAR’s chief economist. “That said, there has been an increase in permits and requests to build new homes.”

The uptick in permits for single-family homes for eight consecutive months could help ease some inventory woes as soon as mid-2021, Yun says. “There will also be a natural seasonal upswing in inventory in spring and summer after few new listings during the winter months,” Yun says. “These trends, along with an anticipated ramp-up in home construction, will provide for much-needed supply.”

Also, the economy is showing signs of improvement, particularly as COVID-19 vaccination efforts step up, Yun says. However, Yun cautions that could mean longer-term interest rates may soon rise due to the improving economic prospects. He also noted rising inflationary expectations and higher budget deficits as challenges. Mortgage rates have been hovering near record lows over recent months, lowering borrowing costs for home shoppers. Last week, the 30-year fixed-rate mortgage averaged 2.81%.

Still, “I don’t see foresee mortgage rates jumping at an alarming level, but we should prepare for a rise of at least a decimal point or two,” Yun says.

January 2021 Pending Home Sales by Region