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Pending Homes Sales Increase for Fifth Month

Posted Wednesday, August 5, 2009

The National Association of Realtors' Pending Home Sales Index rose by 3.6 percent in June, its fifth consecutive monthly increase. The index now stands at 17.7 percent above the low point hit in January. By region, the sharpest rise in June was in the South, where the index rose by 7.1 percent. The index for the South is up 22.5 percent from its January low point. The other three regions had considerably smaller increases in June, although both the Midwest and Northeast have seen sharper bounce-backs since January, with the indexes rising by 23.9 percent and 43.5 percent, respectively.

The index for the West actually bottomed out in February. It is now up 12.5 percent from its February level. However, it is the only region where the index is down from its year ago level, trailing by a slight 0.2 percent.

The rise in the Pending Home Sales Index is consistent with a number of other recent releases showing an uptick in housing. The June pending sales data is especially important because it indicates that the rise in sales in May and June (which were largely contracted in April and May) was not just due to the extraordinarily low interest rates hit in April. With contracting still occurring at a relatively rapid pace in June, clearly sales rates are up substantially from their winter lows.

It is worth noting that the First Time Homebuyer Tax Credit may be a factor that is temporarily lifting home sales. With this credit currently scheduled to expire at the end of November, many people who might otherwise have put off buying a home have decided to move earlier. This could mean a falloff in purchases in late October, when it no longer is possible to complete a closing before the expiration of the credit. It is also possible that Congress will extend the credit, which could have the perverse effect of slowing sales, since homebuyers will no longer be concerned about the deadline.

The one data set that continues to be out of line with the evidence of a pick-up in the housing market is the Mortgage Bankers Association's Mortgage Applications Index. The purchase component of this index has been hovering near 260 for most of the summer. This is very near the low points for the index. It is difficult to understand how there can be a substantial increase in sales without an increase in mortgage applications.

This seeming inconsistency could perhaps be explained by an increase in the percentage of the applications that are being approved, so that the same number of applications corresponds to a larger number of mortgages being issued. It is again worth noting that the ratio of applications to sales has not risen notably in this slump, indicating that the inability of potential homebuyers to get mortgages has not been a big factor in the housing downturn.

While the modest uptick in housing will provide some lift to the economy (residential construction actually rose in June), the fundamentals in the housing market will remain very poor for the foreseeable future. There is an enormous inventory of both new and existing homes. The latter is partly concealed by the decision of many sellers to at least temporarily delay selling their homes. The fall in the vacancy rate for ownership units in the second quarter was accompanied by a much larger rise in the vacancy rate for rental units. This presumably is explained by the decision of homeowners to rent rather than sell their house. If there is a notable uptick in the housing market, then these homes will be put up for sale.

Furthermore, the economic situation will continue to be a drag on the housing market well into 2011. Unemployment is almost certain to continue to rise at least into 2010, and is not likely to begin to fall much until late next year. In addition, mortgage rates are more likely to go up than down, as the Fed will eventually become fearful about keeping rates at such an extraordinarily low level. In short, there is no reason to expect a sustained recovery in housing for some time.
By Dean Baker