Economist's Commentary: August 7, 2008
Pending Home Sales in June
By Lawrence Yun, Chief Economist
Pending home sales rose 5.3 percent in June. The increase occurred in all four major regions, with the South gaining the most at 9.3 percent. The latest reading of 89.0 is the highest since October of last year.
As we know from the REALTOR® mantra - location, location, and finally, location - matters a lot. Contract signings to buy homes rose significantly in Sacramento, Riverside, Las Vegas, Orlando, and other markets that experienced significant price reductions. No news on this trend since this has been evident for the past several months. What is new is that we are now beginning to see year-over-year increases in affordable mid-America markets. Columbus, Oklahoma City, Colorado Springs, Charleston (WV), and Spartanburg are examples. Pending sales increases appear to be broadening.
On the opposite end, pending sales have weakened sharply from a year ago in the Pacific Northwest and Texas. These areas have the strongest employment conditions in the country. Dallas, for example, has gained 57,800 net new jobs in the past 12 months - essentially a stadium full of people with new jobs. Yet, pending sales are trending low in Dallas. Because of the strength of the job market, many homes in both Texas and the Pacific Northwest have not experienced price declines.
As with any monthly data, there will be bounces and noises in the statistical measurement. I am encouraged by the rise, particularly in the hard hit areas, but several more additional months of similar gains would be need to assure that a firm recovery is taking place. I am also encouraged by some cases of multiple-bidding in San Diego and the like where prices have plunged from just one year ago. The multi-bidding suggests that there are buyers out there and that we may be hitting a price floor in these markets.
The near-term outlook is for gains in actual closings at the settlement table. The housing stimulus package that was recently enacted will also be a factor in helping to raise sales and carry the momentum into 2009. Many homebuyers will want to take advantage of the home buyer tax credit. Consumers who have been facing outrageously high interest rates on "jumbo" loans will also get a break because of the permanently higher loan limit for FHA and Fannie/Freddie backed mortgages.
Before celebrating too early, we should be mindful of the fact that the pending home sales data coverage is less robust than the closings measurement as reported in Existing Home Sales. So the trend on closings may not show a direct one-to-one relationship. Furthermore, with lenders scrutinizing every mortgage origination, some of the contracts may fall out at the last moment.
The longer-term forecast also contains many uncertainties. Despite some growth in economic output as measured by GDP, the job market is unusually soft. Recent stock market gains could be genuine signs for better economic times ahead or could simply be a head-fake for stock traders who love volatility. The mortgage rates are still at near historically favorable terms, but that could change for the better or worse depending upon how stubbornly inflation stays elevated, or by foreigners' appetite for U.S. government and Fannie/Freddie bonds. Oil is always a wildcard. If the price of oil slid to less than $100, then the U.S. economy would growth much faster.
As to the housing market forecast, I would say that given the unprecedented speedy price declines in those hard-hit markets, most of the price cuts have already occurred. There is better upside potential than down from this point onwards. Though the national home price forecast is important for lenders and other macro players as they need to evaluate the overall national portfolio, it means very little to consumers. With so much variation, consumers need to do their local homework to assess what may happen in their market. For example, I see Denver possibly experiencing a price gain of 10 percent from now to next year.
No good news for homebuilders. Builders will need to further cut back on production. Given that it will take some time to absorb the high inventory, the forecast is for housing starts to continue to decline through the middle of next year. It will then settle at around 800,000 (compared to over 2 million during the boom years) and any gains from that point will likely not be that robust either.
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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