Economists' Commentary: Pending Home Sales in January
March 3, 2009
By Lawrence Yun, Chief Economist
The pending home sales index, which measures contracts to buy a home and not settlement closings, fell in January. The latest reading of 80.4 is 7.7 percent lower from December and 6.4 percent lower from 12 months ago. Because the index was started in 2001 with a value of 100, the current activity is 20 percent down from 2001. The peak year was in 2005 when the index reached 124.
Regional breakouts are here. Only the West region, led by rising activity in California, Nevada, and Arizona, showed a year-over-year rise in pending sales. The rise in some local markets is quite spectacular with Bakersfield and San Diego showing above 60 percent gains from one year ago as buyers took advantage of tumbling home prices. North Carolina and Tennessee were notably weak markets in terms of pending sales, though not in home prices.
Job losses have been piling on quickly in recent months. The tanking stock market no doubt added to the 'shock' factor for consumers to take a pause. In addition, many rational home buyers were waiting for the final language of the stimulus bill before making a purchase that requires a substantial expenditure. Now that the stimulus bill is passed - with $8,000 on the table for the first-time home buyers - more people will be responding to this incentive over time. The buyers who are able to take the tax benefit are healthy buyers in terms of finances since they are able to meet the much tougher underwriting standards. The $8,000 is also a bigger incentive for more affordable regions of the country, so we may see a bigger stimulus impact in middle America in comparison to the higher-priced coastal markets. The buyers in coastal markets are getting the benefit of sharper declines in home prices, however.
It is a buyer's market for sure. Buyers have everything going for them: 50-year low mortgage rates, wide inventory selection, tax credit for first-timers, and a record high affordability index. The only thing they lack is confidence. Even so, rising affordability has been associated with rising home sales even in times of recession because about 90 percent of the workforce would still have jobs.
The home buying process requires several months, from internet searches for homes, to visiting open houses, to finding the mortgage, to conducting a home inspection, and a myriad of other related activities. Therefore, the kick from the stimulus will not show up in the data until at least May, for which the data will be reported in June/July. Once the buying picks up, it would be interesting to observe if the rebound will be a U-shaped or V-shaped recovery. California markets clearly show that once things pick up, others who had been sitting on the fence also decide to jump into the market quickly. The forecast is difficult with so many moving parts. So I will await the outcome, despite my guess at the moment. The economic projections have been downgraded with the GDP contracting 2.5 percent in 2009 and the unemployment rate peaking at 9.4 percent.
One thing is for sure. The economy will not be able to recover in a sustainable way without home price stabilization. As long as home prices continue to fall - that is, if they overcorrect significantly beyond what can be justified by fundamentals of mortgage rates, income, and rent metrics - the economy will hemorrhage. Falling home values are cutting lifetime savings in home equity and will consequently lead to a contraction in consumer spending. Falling home values also raise the probability of default as more people are put into an underwater situation of owning far more in mortgage debt than the value of their home. Falling home values bleed away bank balance sheets. For these reasons, housing demand must first rise to help clear the inventory, which will then help stabilize home prices. Stable home prices, in turn, will lay the foundation for sustainable economic growth and job creation.
The data is from the multiple listing services. If a foreclosed property is on MLS, then it is captured in the index. If not on the MLS, then we do not have information about those trends.
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