The Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, fell 8.7% in December to 92.4, from a downwardly revised 101.2 in November. The December 2013 PHSI reported by the National Association of Realtors (NAR) was 8.8% lower than the same period a year ago, and was the lowest since October 2011.
The December PHSI fell in every region: 10.3% in the Northeast, 6.8% in the Midwest, 8.8% in the South and 9.8% in the West. Year-over-year, the December PHSI fell 5.5% in the Northeast, 6.9% in the Midwest, 6.9% in the South and 16.0% in the West.
The PHSI has decreased every month since May. The NAR attributed much of the gyration in the December PHSI to “unusually disruptive weather across large stretches of the country.” If weather was the driving force, then the continued extreme winter weather throughout the country, including the South, does not bode well for existing sales in January and February.
A policy item that could also affect existing home sales is the recent expiration of the tax exclusion for mortgage debt forgiven. A tax extender item that expired at the end of 2013, the sunset of the tax exclusion may reduce the volume of short sales that involve a partial writedown of mortgage principal. Absent the exclusion, the forgiven debt is treated as taxable income, which reduces the incentive for some underwater homeowners to sell their principal residences. It is unclear when Congress will deal with tax extenders in 2014.
Over the long run, economic and housing data continue to describe a modest recovery for housing that will lead to higher levels of construction activity in the years ahead. While this most recent information illustrates that there will be occasionally extreme fluctuations, demographic growth and pent-up demand will support housing recovery going forward.