April 2011 Pending Home Sales Signals Disaster in Home Market

The National Association of Realtors (NAR) pending home sales data for April 2011 suffered a 26% year-over-year decline:

Pending home sales fell in April with regional variations following increases in February and March, with unusual weather and economic softness adding to ongoing problems that are hobbling a recovery, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said the dip in contracts may be due to temporary factors. “The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months,” he said. “The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.”

Yun notes the growth in retail sales slowed measurably in April, while sales at furniture and home furnishing stores declined sharply. “Nonetheless, the magnitude of the fall in pending home sales is larger than can be implied by broad economic factors, so we need to see if it’s just a one-month aberration.”

Yun said tight credit is the primary long-term factor holding back the market. “No doubt the continuing excessively tight mortgage underwriting process is making the housing market recovery unnecessarily slow,” he said. “Lenders and bank regulators need to be mindful of the historically low default rates among mortgage borrowers of the past two years. A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves.”

“We simply have to get back to sound, common-sense lending standards to provide mortgages to creditworthy borrowers who are buying homes well within their means. Bank balance sheets show rising cash reserves and declining loan balances – it’s time to loosen the purse strings,” Yun added.

“Even with very favorable affordability conditions, job growth and a pent-up demand from abnormally low household formation during the past three years, the recovery will continue to be uneven and sluggish given the ongoing credit constraints,” Yun said.

Econintersect uses unadjusted data for its analysis.  This is the buying season and normally you do not see lower month-over-month data, yet in April 2011 it happened.  For sure, comparables to 2010 are against the first time home buyers stimulus, which diminishes the implication of the large year over year decline.

But as the above graph shows, last year’s tax credit does not explain a decline between March and April pending home sales this year.  It is likely the inflation pressures being experienced by consumers is a factor in this decline.

The graph above uses a one month offset on the unadjusted pending home sales index, and graphs it against the unadjusted NAR home sales data.

Based on Econintersect’s analysis, existing home sales in April 2011 should come in at 420,000 – an 20% decline over 2010.  Using this methodology, Econintersect projected May 2011 home sales to be 455,000 – and the actual sales came in at444,000 (analysis here).

The Econintersect forecasting methodology is influenced by the speed at which closings occur.  When they slow down in a particular period – this method overestimates.  The number of cash buyers are speeding up the process (cash buyers analysis here).   A quick cash home sale process could begin and end in the same month.  On the other hand, contracts for short sales can sometimes take months to close.  Interpreting the pending home sales data is complicated by weighing offsetting effects in the current abnormal market.

There is no question a normal historical spring home sales increase is underway.  But this crappy pending home sales data makes 2011 home sales future look bleak.

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