Daily Forecast Update: Pending Home Sales, Income and Savings

August 04, 2009

By Lawrence Yun, Chief Economist

Pending Home Sales

• The housing market appears to be on a sustainable rebound as pending home sales rose for the fifth straight month.  All four major regions showed gains, implying a broad-based recovery.
• The lower-priced points have consistently seen more activity.  The very high-end market remains soft, largely due to the continuing high interest rates on jumbo mortgages.
• Pending sales data measures contract signing by buyers.  However, some of the contracts may encounter last minute hiccups that may delay closings or even an outright cancellation.  The new appraisal process arising from Home Valuation Code of Conduct that went into effect in May has been hampering the closing process.  Though well intended, the rules have led to the unintended consequence of appraisers getting paid less while consumers are paying more, and more appraisals done by people with less local geographic competency.   Therefore, expect a higher than normal fallout rate of pending contracts not reaching the closing tables.  
• Despite the appraisal roadblock, there is a definitive rise in consumer interest.  Lures such as the very high affordability conditions - as home prices have fallen far more than can be justified - and the added tax incentive for first-time homebuyers are bringing buyers back into the market.  Many fence-sitters may also be jumping into the market as there is no longer a good reason to wait for a lower home price.  Separate data from a major home search website showed a 66 percent rise in unique visitors in the latest month compared to the comparable period one year ago.
• My video take on the pending home sales is here.
  

Income and Savings

• The aggregate national income fell by 1.3 percent in June, negating the similar magnitude rise in the prior month.  Job losses are hampering the recovery in income, even as the government income transfer payments have risen.  Compared to one year ago, the total income is down 3.4 percent.  Farm income has fallen by 21 percent due to lower prices on agricultural products.  Rental income rose ever so slightly.    
• The personal savings rate declined modestly to 4.6 percent from a recent cyclical peak of 6.2 percent.  The savings rate had been close to zero in this decade, prior to the onset of the recession.  Consumers are returning to the old-fashioned habit of needing to save a part of their paycheck for rainy days and for retirement rather than purely rely on equity gains in home prices and the stock markets.
• An increased savings rate will be positive for the long haul, but it chokes off consumer spending impact to the economy in the short term.  Though the aggregate consumer spending inched up for the second straight month, the real “inflation-adjusted” spending actually fell (which is often ignored in the popular press).  That is, if you spend more not because you bought more things, but because you were paying higher prices for things (like gasoline), then the economy really did not get the added boost.  
  

What does today’s data mean for REALTORS® and consumers?

• An upturn in housing looks sustainable.  But the housing market is still far from being back to normal.  Current sales activity only matches the level of over 15 years ago when the U.S. had 25 million fewer people.  Inventory levels are still elevated.  To assure a continuing rise in sales, which is critical for the overall economic recovery, home buyer tax credit for the first-time buyers need to be extended beyond the November 30th deadline.  
  Savings at the level of about five percent will be good for the economy and the housing market going forward. 
• People need to realize that entering the market with some level of down-payment will allow for a healthier housing market.  

Daily Forecast Update

• NAR's monthly official forecast as of August 4th
• GDP 2009 Q3: 0.7%
• GDP 2009 Q4:  +1.3%
• GDP 2010 Q1:  +2.5%
• Unemployment rate by the end of 2009: 10.4%
• Average 30-year fixed mortgage rate by the end of 2009: 5.5%

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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