After seeing a modest three-month rise in activity, pending home sales cooled considerably in January to their lowest level in over three years, according to the National Association of Realtors. All major regions experienced monthly and annual declines in contract signings last month.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 4.7 percent to 104.6 in January from a downwardly revised 109.8 in December 2017. After last month's retreat, the index is now 3.8 percent below a year ago and at its lowest level since October 2014 (104.1).  

Lawrence Yun, NAR chief economist, says pending sales took a noticeable step back to start 2018. "The economy is in great shape, most local job markets are very strong and incomes are slowly rising, but there's little doubt last month's retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates," said Yun. "The lower end of the market continues to feel the brunt of these supply and affordability impediments. With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment." 

Added Yun, "Even though contract signings were down, Realtors indicated that buyer traffic in most areas was up January compared to a year ago. The exception was likely in the Northeast, where the frigid cold snap the first two weeks of the month may have contributed some to the region's large decline."

The number of available listings at the end of January was at an all-time low for the month and a startling 9.5 percent below a year ago. In addition to new home construction making progress closer to its historical annual average of 1.5 million starts, Yun believes that two other factors must start occurring to alleviate the excruciatingly low supply levels that are slowing sales: institutional investors beginning to unload their portfolio of single-family properties back onto the market, and more hesitant homeowners deciding to sell.

"As new multi-family supply catches up with demand and slows rents, some large investors may begin putting their holdings of affordable single-family homes up for sale, which would be great news, particularly for first-time buyers," said Yun. "Furthermore, sellers last year typically stayed in their home for 10 years before selling (an all-time high); although higher mortgage rates will likely discourage some homeowners from wanting a new home with a higher rate, there are possibly many pent-up sellers who may look to finally trade-up or move down this year."

In 2018, Yun forecasts for existing-home sales to be around 5.50 million – roughly unchanged from 2017 (5.51 million). The national median existing-home price this year is expected to increase around 2.7 percent. In 2017, existing sales increased 1.1 percent and prices rose 5.8 percent.

The PHSI in the Northeast dropped 9.0 percent to 87.0 in January, and is now 12.1 percent below a year ago. In the Midwest the index fell 6.6 percent to 98.2 in January, and is now 4.1 percent lower than January 2017.  

Pending home sales in the South declined 3.9 percent to an index of 121.9 in January, and are now 1.1 percent lower than last January. The index in the West decreased 1.2 percent in January to 97.9, and is 2.5 percent below a year ago.