The housing market is seeing signs of life. Pending home sales in May rose by eight percent compared to April, according to the National Association of Realtors, which reported the uptick in the housing market on June 30.
Economists interviewed by business and finance news website MarketWatch initially predicted that pending home sales in May would decrease by at least one percent.
Compared with May 2020, pending home sales in May of this year are up by 13.1 percent. But a lot of this lack of activity in the housing market last year could be blamed on the onset of the Wuhan coronavirus (COVID-19) pandemic.
"May's strong increase in transactions – following April's decline, as well as a sudden erosion in home affordability – was indeed a surprise," said Lawrence Yun, chief economist for the NAR. "The housing market is attracting buyers due to the decline in mortgage rates, which fell below three percent, and from an uptick in listings."
The 30-year fixed mortgage rate declined to 3.36 percent in May. It even fell to as low as 3.23 percent before bouncing back up. At the end of April, the rate was 3.42 percent.
The changes in the housing market are being tracked in the Pending Home Sales Index (PHSI). The eight percent rise brought the index up to 114.7. An index of 100 is equal to the level of market activity in 2001.
The index tracks market activity in four regions: the West, Midwest, Northeast and South. All regions saw a significant increase in sales, with the largest surge coming from the Northeast region with a 15.5 percent month-over-month increase. The smallest increase was in the South, which felt a still-significant 4.9 percent uptick.
Home prices still on the rise, economists predict slump in latter half of 2021
The drop in mortgage rates has given homebuyers relief as they are also facing record-high prices for homes. This, added with the increasing number of homes hitting the market after an all-time low in inventory is a sign that the housing market may recover.
But the historically low inventory caused home prices to skyrocket in April to a new record and at a pace not seen in over 30 years. Total housing inventory at the end of May was up by seven percent from April to 1.23 million units. But compared to May 2020, there are 20.6 percent fewer housing units for sale. (Related: Pension funds are buying up entire neighborhoods of single family homes, contributing to America's housing crisis.)
Despite the record-high home prices and the low inventory, Yun said potential homebuyers "are still lining up at a feverish pace." He said many potential homebuyers have the funds to purchase new homes because of the elevated stock market.
"The jump in May pending home sales underscored the current real estate market, which is being propelled by strong buyer demand, favorable demographics and low-interest rates. At the same time, the number of homes available for sale remains well below a year ago, even when compared to the quarantine lockdown period," said George Ratiu, senior economist for real estate listing website Realtor.com, in a press statement.
Ratiu said this means the housing industry needs to construct a lot more homes and needs to hire more realtors to facilitate the sale of these newly-built housing units.
"Although we are beginning to see an improvement in the supply of existing homes for sale and the cost of building materials, which should lead to more new construction, a larger increase in supply is key to rebalancing the real estate market," Ratiu added.
Despite the optimism in the market, economists are anticipating a slowdown in real estate transactions during the second half of 2021.
Ian Shepherdson, chief economist for economic research and consultancy firm Pantheon Macroeconomics, noted that mortgage applications dropped by 26 percent between December 2020 to April 2021. He then noted that "sales will soon hit bottom, given the flattening in mortgage demand over the past couple months."
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