Pending home sales down sharply on economic uncertainty

Forward-looking indicator tracks signed contracts

By Anneken Tappe, CNN Business
Justin Sullivan/Getty Images

(CNN) - Americans have been reluctant to buy homes lately, thanks to uncertainty about the U.S. economy. Now their fears are showing up in the data.

The pending home sale index — a forward-looking indicator that tracks signed contracts for home purchases — dropped sharply in July. Its 2.5% decline, to 105.6, took economists by surprise; the consensus expectation was a flat number from June, when the index stood at 108.3, according to Refinitiv.

Fewer signed contracts suggest that home sales in August and September will also be lower.

Economic uncertainty is holding back potential demand, said Lawrence Yun, chief economist of the National Association of Realtors.

Bond yields are falling and the Treasury yield curve — a historic recession indicator — is flashing warning lights. On top of that, the U.S.-China trade war remains unresolved and the Federal Reserve is lowering rates, adding to the narrative that things aren't going so well.

Mortgage rates are at multi-year lows — 3.94% on an average 30-year fixed-rate loan of $484,350, according to the Mortgage Banking Association. Mortgage rates on larger loans are 3.89%.

Bond yields have been falling relentlessly of late. On Wednesday the 30-year Treasury bond yield, which mortgages are indexed against, fell to its lowest level on record at under 2%.

But that hasn't inspired a run on the housing market — yet.

Mortgages are only one piece of the puzzle, said Yun. "What is desperately needed is more supply of moderately priced homes."

A boost in home building could alleviate such a shortage while improving economic growth. But tariffs on construction materials, and a scarcity of construction workers in a tight labor market with rising wages, weigh on the industry.

The residential housing market isn't the only gloomy indicator. Overseas investors in commercial buildings, such as offices and retail spaces, sold more than they bought for the first time in seven years during the first half of this year, according to a report from Real Capital Analytics. While investor acquisitions totaled $21.3 billion, sales came to $21.4 billion, making them net sellers.

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