It’s no secret that the real estate market has been hot in many regions as an intense seller’s market continues to spur bidding wars and homes selling well over appraisal. As most homes hit the market, they’re immediately snatched up by buyers, so one might expect home sales to keep climbing. But they’re not, at least depending on which report you look at. According to the National Association of Realtors, “Existing home sales decreased for a fourth straight month in May ,” but pending home sales actually increased. What’s the discrepancy between the two findings, and what does that look like? Let’s take a closer look!
Difference Between Existing and Pending Home Sales
Existing home sales refers to home purchase contracts whose transactions have closed. But because most real estate transactions involve financing through a mortgage, the time from contract to close can typically range from 4-8 weeks. To compensate for this lag time, market analysts look at pending home sales, which refer to the number of real estate contracts signed, but not yet closed.
Pending home sales reports are often seen as more accurate representations of market activity because they measure activity from sellers, buyers, agents and lenders whose combined actions are being driven by the ultimate goal of a signed contract. Existing home sales, on the other hand, merely reflect the end of that process, which can be affected by any number of influences outside of those major players and thus is considered more of a formality than an actual measurement of market strength.
Comparing May’s Reports
Existing home sales dipped 0.9% in May, but pending home sales were up 8%. The slight dip in existing home sales was attributed to consistently low inventory and high prices that are keeping some buyers from entering the market. NAR reported that “the median existing-home price for all housing types in May was…up 23.6% from May 2020 ($283,500), as every region registered price increases. This is a record high and marks 111 straight months of year-over-year gains since March 2012.”
So, with high prices and dwindling inventories, what explains the pending home sales increase?
Even though inventories are still tight, May’s existing home listings (i.e., not new construction homes) actually increased to 2.5 months’ worth, the highest that number has been since October 2020. And, looking at overall market activity, buyers and investors are still in the market in hopes of finding their next home to tap into low mortgage rates, which fell in April below 3%.
More homes available to be purchased paired with a deep pool of buyers meant that more contracts were able to be signed in May.
Lack of Inventory Still the Driving Factor
Instead of increase prices, sales are declining largely because of the ongoing lack of inventory.
NAR reported that May’s total housing inventory was down 20.6% from a year ago, and that “eighty-nine percent of the homes sold in May 2021 were on the market for less than a month.” This supply and demand issue has created a dip in existing sales because the supply of homes can’t keep up with the intense demand. Lawrence Yun, NAR’s Chief Economist summarizes it by stating “Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”
With fewer homes on the market for sale, the ones that are being listed are reaping the benefits of quicker selling times, higher sales prices, and depending on the market, a much easier process for sellers in terms of negotiations.
Existing home sales are still up 44.6% year over year. And, not only are the number of sales still up from 2020, the value of homes has also significantly increased.
Let’s Talk About New Construction
New construction home sales dipped 5.9% month over month in May, largely due to softening demand. The skyrocketing costs of labor, materials and appliances have increased the cost of newly built homes 18.1% since last year, with April to May prices increasing by 2.49% to a median of $374,400. According to Moody’s Analytics economist Bernard Yaros, however, “Over time, supply-side issues that have pushed up the price of building materials will be resolved and more construction labor should come on line.”
While supply is still currently lagging demand, Yun predicts that new construction will factor more into pending sales; supply will improve, which would open up more options for potential buyers and help tamp down skyrocketing prices. As logistics, lumber, and material costs have caused significant issues for new home builders, those issues seem to be correcting. According Yun’s analysis of the June’s job report, “Residential construction workers and general contractors rose by 15,200, showing that more homes will be completed in the upcoming months and more housing inventory will be added.” This is welcome news to home buyers that have grown weary from bidding wars and low inventory.
The Pandemic Is Still Impacting Some Sales
While we are more than a year into the pandemic, the way in which people live and work has changed dramatically—and that may not be a temporary change. The ability to work and school from anywhere has changed the landscape of real estate. NAR’s report highlighted that, since the beginning of the pandemic, vacation home sales have increased over 57% year over year.
Regular home buyers may now also be competing with second home/vacation home buyers. Yun predicts, “As businesses decide new guidelines for remote workers, even allowing permanent remote options in some cases, look for vacation homes to remain a popular option.”
Bidding War Intensity May Soften, But Not Prices
Buyers who have lost out on homes due to intense bidding wars and inflated prices may be able to take a sigh of relief as inventory picks up; however, that doesn’t mean it will be back to “normal.” Lawrence Yun cautions “Expect continuing solid price gains in the upcoming months. Some calming of the market is only expected to happen in late autumn of this year and into 2022… A home price decline is unlikely.” For sellers, this means if they still plan to sell in 2021, they could still realistically see greater value in their home.