Tools for Recovery

by Lawrence Yun, NAR Chief Economist

Pending Home Sales: The Good and Bad

Pending sales have fallen in some areas of the country that are considered healthy. Seattle, Nashville, and Austin markets have experienced nice rates of home price appreciation and the prices year-to-date have continued to rise or have held. But higher home prices and the associated affordability problems have begun to hold back potential home buyers in these markets - despite their solid job growth.

But let's talk a minute about pending sales. While we generally assume that pending home sales "close" within 2 months of signing, "pending to closing" does not have a direct one-to-one relationship. There are several reasons for this. The sample coverage on pending sales (that is, the data sample on which NAR Research calculates the pending home sales index) is much smaller than that of actual closings as recorded in existing home sales. In addition, some contracts could "fall out," and consequently do not close (i.e., do not result in an actual sale and so do not show up in the home sales statistics). Furthermore, that traditional lag time of two months between contracts and closings may be rising.

Still, April's measure of pending home sales was a solid jump - and the first rise in the index since the beginning of the year. I am hopeful that this is the beginning of a momentum that can build and thus unleash chain reactions from some sellers now able to start buying trade-up homes. Remember: housing markets had been partly frozen because would-be repeat buyers could not purchase because they first needed to sell the homes they already owned.

The good news on pending sales in April was tempered by the latest inventory statistics. Housing inventory rose to its second highest level ever with 4.55 million homes listed for sale - an 11.2 month supply at the current sales pace and an increase of 10.5 percent from the prior month (or by 434,000 units). Part of the rise in supply is due to a normal seasonal increase from March to April. More new inventory reached the market over these two months than in any other months. Even so, the high inventory levels are uncomfortable. It is also a signal to many home sellers to be more realistic about pricing to attract buyers. Unless you have those immaculate, unique home features, don't even bother listing if you are not going to concede on prices in today's market.

Because of high inventory, home prices are continuing to fall in most parts of the country. The national median existing home price in April was $202,300 -- an 8.0% decline from one year ago and the second largest price decline since NAR began tracking price data in 1968. It is important to note that some of the price declines are not genuine housing value declines; they just reflect the fact that more smaller-sized and lower-priced homes are being sold.

What's in Store

The up-tick in the latest pending sales will help existing home sales to be modestly higher in the second quarter of this year versus the first quarter. The sales in the third and fourth quarters are anticipated to be notably higher. There are several underlying reasons:

• Removal of "declining market policy" by Fannie and Freddie. Fannie Mae and Freddie Mac had imposed a "declining market policy" of requiring a higher down payment and higher credit scores in lending in regions where prices had been falling. However, that policy exacerbated the downturn by reducing housing demand. Given that "Fan and Fred" were created with the mission of providing credit in times of crisis - they decided to do away with that policy beginning this month (June 2008). This is welcome news in terms of maintaining underwriting standards without going overboard in being too stringent.
• Significant reduction in conforming jumbo mortgage rates. Another very positive development is in the falling mortgage rates on conforming jumbo rate loans recently. In spite of newly enacted legislation early in the year raising the loan limit, the mortgage rates on these higher loans did not fall. However, Fan and Fred have become very active in purchasing these loans and mortgage rates have fallen by a full one-percentage point - e.g., from 7.5 percent to 6.5 percent. That is a great news for homebuyers in high-cost regions. (The super jumbo non-conforming loans still carry very expensive
  interest rates.)
• More applications for FHA loans by borrowers who would have been subprime borrowers this time last year. Since the summer of 2007, home sales were hampered by a sudden disappearance
  of subprime loans. But FHA loan applications have been rising and I believe the FHA program will be able to bring some of the buyers who would have used subprime loans into government-backed loans that carry much lower interest rates.
• Improving economy. The economy will see a growth of about 2 percent in the second half of this year. That will turn the job market to the positive side with net job gains possibly of 350,000 in the second half.
• Home buyer tax credit. There is a better than 50-50 chance that the President will sign a big Housing bill from Congress before the 4th of July. The key element of the bill from my point of view is the temporary homebuyer tax credit. This tax credit will induce fence-sitters back into the marketplace.
• Chain reaction buying. Many home sellers are not able to buy because they cannot sell their homes. However, there is always a bit of chain-reaction momentum that will build. An increase in buying unleashes existing sellers to buy the next home - and so forth.

As a result, I see improved sales in the second half of this year. Prices are more difficult to predict. More transactions have been occurring on the lower end. But we may begin to see more sales in the higher end with falling rates on conforming jumbo loans and from the chain-reaction factor.