Pending Home Sales Indicate 25% YoY Home Sales Decline for November

Pending home sales rose this month according to the National Association of Realtors (NAR).  Their headlines:

Pending home sales jumped in October, showing a positive uptrend since bottoming in June, according to the National Association of REALTORS®.

The Pending Home Sales Index, a forward-looking indicator, rose 10.4 percent to 89.3 based on contracts signed in October from 80.9 in September. The index remains 20.5 percent below a surge to a cyclical peak of 112.4 in October 2009, which was the highest level since May 2006 when it hit 112.6.

Last October, first-time buyers were motivated to make offers before the initial contract deadline for the tax credit last November. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said excellent housing affordability conditions are drawing home buyers. “It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” he said.

“More importantly, a return to more normal loan underwriting standards and removal of unnecessary underwriting fees for very low risk borrowers is needed and could quickly help in the housing and economic recovery,” Yun said. Recent loan performance data from Fannie Mae and Freddie Mac clearly demonstrates very low default rates on recently originated mortgages, much lower that the vintages of 2002 and 2003 before the housing boom.

Near term, Yun expects home sales will continue to climb from their cyclical low this past summer. “Even so, we now have some consumer concerns regarding the mortgage interest deduction, an important component in housing affordability,” he said. “Preliminary results of a new survey show nearly three out of four home owners and two out of three renters consider the mortgage interest deduction to be extremely or very important to them. Home owners already pay between 80 and 90 percent of all federal income taxes and additional tax burden would hurt them and the economic recovery, so we have a reasonable hope that it will not be changed.”

The NAR publishes unadjusted data and this is used for Econintersect’s analysis.  Some context needs to be added to the rose colored commentary of the NAR.

In October 2010, existing home sales totaled 359,000 (analysis here).   Based on historical relationships and offsets of existing and pending home sales data – the forecast for existing home sales in November 2010 would be 360,000 (basically flat from October – data unadjusted).

The three month moving average for pending home sales remains in a cyclical downtrend regardless of the uptick in this month’s pending home sales.  In November 2009, existing home sales were 471,000, and the 360,000 forecast by Econintersect for November 2010 home sales would represent a 25% decline YoY.

Curiously, the rise in pending home sales may (or may not) be an indication of support for home prices which have started to decline again.  

According to Realty Trac (reported by Reuters), third quarter sales of foreclosure homes declined 25% from second quarter sales and 31% from 3Q/2009.  If foreclosure sales have not contributed proportionately to the pending home sales increase that appears to be occurring in the fourth quarter, the implication would be that home sales prices could be supported by market action.  The reason, as reported by Reuters:  Foreclosures sell for approximately 32% less than homes not in the foreclosure process.  If the proportion of sales of sales coming from foreclosed problems declines, home prices may not fall as much , or perhaps remain steady or rise, until the number of foreclosure sales increases again.  So, if a slowdown in foreclosure sales does continue through 4Q/2010, home prices may be temporarily firmer.  The operative word here is temporarily; the backlog of foreclosed homes remains and will start selling again when the title questions associated with foreclosed properties start getting resolved.  And, even longer term, foreclosures yet to come have been estimated variously at 5 million or more.  

Taken in perspective, there is little good news in pending home sales data.  The NAR statement that pending home sales bottomed in June is possibly specious as we go into the seasonally slow months of December, January and February.  The PHI (pending home index) only needs to fall 15% to set a new low.  Last year the PHI fell 20% from October to January.  

Related Articles

The Mortgage Mess  by Yves Smith

Unemployment and Foreclosures  by John Lounsbury

Housing Price Decline Continues  by Steven Hansen

The Aggregate Picture on Mortgage Delinquencies and Foreclosures  by Edward Harrison (Credit Writedowns)