The pending home sales index levels in the US have dropped in May to a record low, even worse than during the worst of the financial crisis of 2008. This plunge follows an industry-wide slump in housing market activity that was caused by the economic disruption due to the coronavirus pandemic.
The index, which is a measure of purchase contracts that were signed but not closed, fell by 44.3% in May to 79.7, the lowest level ever reported since its 2002 inception by the National Association of Realtors. This marked a precipitous decline from April, when the index had already fallen 16.1% from the previous month. It is also a far cry from the previous May of 2019, when it stood at 102.8 points.
The news of the index’s plunge led to a sharp drop in homebuilding stocks. Traders have grown increasingly nervous about the ability of homebuilders to generate revenues at a time when the US economy is facing its worst contraction since the Great Depression. Additionally, lenders such as Bank of America, Wells Fargo, and JPMorgan Chase have recently introduced tougher restrictions on commericial real estate lending, leaving many potential homeowners with fewer financing options.
The plunge in pending sales is particularly worrisome as demand for housing often serves as an indicator for an economy’s health. The lack of liquidity in the market caused by the pandemic, combined with the looming uncertainty about the strength of the US economy’s recovery, could cause further drops in the index in the future.
Though the situation is concerning, it is worth noting that first-time buyers remain significantly active in the housing market. According to Lawrence Yun, the chief economist of the National Association of Realtors, those buyers are actively taking advantage of record low interest rates, despite the other uncertainty that is prevalent. As unemployment continues to spike due to the pandemic, however, this group could also potentially slow their home-buying activities.
The reality of the pending home sales index is indicative of the economic confusion that has been caused by the crisis. With a wide range of economic factors at play, it is difficult to predict what the future of the US housing market will look like. Nevertheless, the pending sales figures should be monitored closely in the coming months in order to gain an updated insight into our current economic climate.
