May Pending Home Sales and Forecast

By Lawrence Yun, Chief Economist

Pending home sales retreated in May following a very solid rise in the previous month. The latest data points toward soft yet stable home sales activity in the short term.

The Pending Home Sales Index fell 4.7 percent to 84.7 in May. In April, the index made a surprising jump by rising 7.1 percent. The South was the soft spot with a 7.1 percent decline during the month. The West region fell the least with only a 1.3 percent fall. Even with the fall, the West was the only region experiencing a year-over-year rise in pending home sales contracts.

The rising activity is primarily in markets with higher foreclosures and significant price declines. Lower prices have greatly improved affordability conditions. The areas seeing particularly healthy rises in pending home sales (from a year ago) were in California such as:

• Santa Clarita City (in LA County)
• San Diego
• Sacramento
• San Fernando Valley
• East Bay area (around Oakland)
• Bakersfield

Other markets with a notable rising contract signings were in:

• Pikes Peak - Colorado Springs area
• Fairfax County, VA (D.C. suburb)
• Spartanburg, SC
• Jackson, MS
• Coral Gables, FL

The markets with significant declines in pending sales were in regions where prices increased over the past two years in a healthy way. They include:

• Rochester, NY
• Austin, TX
• Charlotte, NC
• Nashville, TN
• Seattle, WA

The patterns of rising and falling markets have been consistent over the past three months with sales rising in distressed areas while sales were falling in healthy markets. The adjectives "distressed" and "healthy" referring to what is happening to home prices and the accompanying homeowners' housing equity in that locality.

As to the forecast, the economic situation deteriorated more than expected. Job cuts continued for the sixth straight month to June and the unemployment rate jumped nearly a full percentage point to 5.5 percent from what it had been in 2006 and 2007. Meanwhile, inflation has picked up. High inflation, in turn, has begun to pressure long-term interest rates to rise because lenders want to be compensated for the loss in the purchasing power when they get the money back.

The stock market has been beaten down. Profit expectations have been lowered from the weakening economy. However, recent and upcoming corporate profits are still respectable (outside of financials and homebuilding) and, hence, can support a much higher stock market valuation. Perhaps the latest declines are an effort to move the stocks out of weak hands and into strong hands. One "big scare," i.e. the Dow falling by 400 points in one day, may be needed shake off the weak hands and clear the way for the market to have a sharp upward bounce and a sustained longer-term rise.

The GDP forecast is only at a 1.6 percent and a 1.4 percent expansion for 2008 and 2009. That growth rate would be only half the normal healthy rate of expansion. Job growth will turn positive in few months but the recovery will be slow going.

Regarding the housing market, I would say that those markets that have undergone a major price decline to the tune of 20 to 30 percent are ripe for recovery. In fact home prices may soon rise as evidenced by rising sales and reports of multiple bidding following sharp price reductions. For homeowners who bought two years ago at the peak, it is a small consolation. It will take at least two years to fully recover the lost value. But for recent homebuyers, the price gains will directly translate into equity gains.

As for the "healthy markets" of Austin, Charlotte, and Seattle, an interesting dynamic will be at play. Sales have come down in these markets, but not prices. Will the lower sales and higher inventory pressure prices to fall? Or are these markets merely taking a pause before a next round of increasing activity? After all these markets have one of the better performing economies and job gains have been quite good.

The Fed is in a bind: a slow economy and high inflation. The focus has been shifting to controlling the latter. That is proper - high inflation will damage home sales because mortgage rates, which cannot be controlled by the Fed, will commensurately rise with consumer price inflation. Mortgage rates will bounce up from historic lows in the second half and into 2009. Still, the average mortgage rates on conforming loans will remain comfortably below 7 percent.

The Congress is near to completing the housing stimulus bill. The bill's passage appears veto-proof. Particularly important will be the homebuyer tax credit to get people off the fence. First-time buyers entering the market will help untie the paralysis of the current condition of many home sellers who cannot buy because they cannot sell. Therefore, the housing market will get a jolt and gain some momentum in few months time.

View the Pending Home Sales chart here > (57K PDF)

View the Forecast Tables here >  (250K PDF)

 

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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