April Pending Home Sales and Forecast

By Lawrence Yun, Chief Economist

Pending Home Sales

Pending home sales, which measures contract signings but not closings, rose 6.3 percent in April. The increase was driven heavily by sales increases in distressed regions undergoing significant price declines.

Regionally, all regions but the Northeast showed solid gains over the month after accounting for seasonal factors. The West region showed an outright gain even on a year ago basis.

A sample of areas with a double-digit rise in pending sales includes:

Sarasota, FL
Fairfax County, VA
San Diego, CA
San Bernardino, CA
Bakersfield, CA
East Bay area, CA
Sacramento, CA

It is unclear at the moment if the dominant purchasers are investors or genuine homeowners. Irrespective, the buyers are picking up properties on the cheap. When viewing back 5 years from now, it is likely to show that the current purchasers got in at near bottom, if not at essentially the absolute bottom.

Pending sales have fallen in regions considered healthy. Seattle, Nashville, and Austin markets have experienced nice home price appreciations and the prices year-to-date have continue to rise or have held. But higher home prices and the associated affordability problems have begun to hold back potential home buyers these regions. The job growths in these areas remain solid, however.

Pending to closing does not have a direct one-to-one relationship. The sample coverage on pending sales is much lower than that of actual closings as recorded in existing home sales and also there could be fallouts of some of the contracts not leading to closings for various last-minute challenges. Furthermore, the lag time between contracts and closings has been said to be rising. However, this month's rise of pending sales is still a solid jump and I am hopeful the momentum can build to unleash chain reactions of some sellers now able to start buying the trade-up homes. The market had been partly frozen because would-be buyers could not buy because they first needed to sell their homes.

Forecast

The uptick in the latest pending sales will help existing home sales to be modestly higher in the second quarter versus the first quarter. The sales in the third and fourth quarters are anticipated to be notably higher. The reasons are the following:

• Removal of "declining market policy" by Fannie Mae and Freddie Mac

Fannie and Freddie had imposed a "declining market policy" of requiring a higher down payment and higher credit scores in lending in regions prices had been falling. However, that policy exacerbates the downturn by reducing housing demand. Given that Fannie and Freddie were created with the mission of providing credit in times of crisis - they decided to do away with that policy beginning in June. This is welcome in terms of maintaining underwriting standards without going overboard to being overly too stringent.

• Significant reduction in conforming jumbo mortgage rates

Another very positive development is in the falling mortgage rates on conforming jumbo rate loans only in the past few weeks. After a new law raising the loan limit early in the year, the mortgage rates on these higher loans did not fall. However, Fannie and Freddie have become very active in purchase 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 to FHA loans by borrowers who would have been subprime borrowers this time last year

Sales had been hampered by a sudden disappearance of subprime loans since the summer of last year. 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 carry much lower interest rates.

• Improving economy

The economy will see a growth of about 2 percent in the second half. That will turn the job market to the positive side with net job gains by possibly by 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 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 an existing seller 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.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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