Pending Home Sales Dropped 10.6% in February. Here's Why

This statistic highlights why today's housing market is such a challenge for prospective buyers.

Talk to anyone who's looking to buy a home today, and you'll probably detect a similar pattern -- there just isn't enough inventory. In fact, that explains why pending home sales decreased by 10.6% in February compared to January, according to the National Association of Realtors. Not only was there a huge overall drop, but all individual regions of the country experienced a decline.

What are pending home sales, anyway?

If you're looking to buy a home, you may hear the term "pending sales" thrown around. It refers to the number of homes for which a contract has been signed, but the deal hasn't yet closed. It can take weeks or even months from when a home goes under contract to when the sale is actually completed because mortgage lenders often need up to 60 days to close on a home loan. But one thing you need to know is that pending home sales are a good way to measure the state of the housing market.

Why are pending sales down?

When pending home sales decline, it can happen for a number of reasons. In some cases, it can boil down to a lack of buyer demand. But that's not the case today. Relatively low mortgage rates are still driving buyers to go after homes at a rapid clip.

Rather, the reason pending home sales are down is that there's not enough inventory to go around. As of the end of February, there were a mere 1.03 million homes available for sale. That's a 29.5% decline from a year before and the lowest supply on record. And it's also why so many buyers are struggling in today's market.

How to navigate a tight housing market

So pending sales are down. Okay. But how does that impact you individually?

Well, it probably means that there's not a lot of inventory for you to choose from, and that when homes in your area do hit the market, there's apt to be lots of competition. A few strategic moves on your part, though, could give you a leg up over other buyers.

For one thing, go in with mortgage pre-approval. That sends the message that you're a serious buyer who's been vetted by a lender already, and that you're less likely to have a problem securing the financing you need to complete a home purchase.

Next, be prepared to go well above a seller's asking price for a home you really want. In a competitive market, coming in with an offer a seller can't refuse could help you avoid a bidding war with other buyers.

Finally, be flexible with the things you will and won't compromise on. In a tight market with limited homes, you may not find a property that checks every item off your list. Decide which features are most important and be willing to bend on others.

Will pending home sales pick up in the coming months?

Whether pending sales activity increases in the near term will depend largely on how many new homes hit the market. Between spring weather, coronavirus vaccinations, and a recovering U.S. economy, more sellers may be motivated to list their properties over the next few months. If that happens, we can expect sales to jump, as there's clearly no shortage in buyer demand. Rather, right now, the main thing holding buyers back is not having homes to buy in the first place.