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Pending Home Sales Drop 3.2 Percent in July

September 10, 2008

The latest pending home sales (contract signings to buy and not closed sales) fell 3.2 percent in July, giving away a large part of the 5.8 percent gain in the prior month. Despite the decline, the overall trend in the past 12 months has been essentially stable with few ups and downs. The July index was 86.5, which is exactly the same as the 12-month average.

The overly stringent lending criteria imposed by Fannie and Freddie in July (and August) in order to preserve their deteriorating capital situation contributed to weaker pending sales activity. Now that the federal government has taken over Fannie and Freddie with the explicit goal of providing more affordable mortgages over the next 12 to 18 months, we will see some return to normalcy in underwriting standards.

There are great divergent patterns among markets. Contact signings were steaming ahead in many California markets. Florida, Nevada, and Arizona are also showing nice turnaround signs. These four states have markedly impacted national statistics during both the boom and bust years. These four states have led the charge in rising foreclosure rates, and are now showing clear signs of a turnaround.

Other markets showing early turning signs include:

  • Exurbs of Washington D.C. (particularly in Northern Virginia)
  • Spartanburg, SC
  • Providence, RI
  • Minneapolis, MN
  • Lansing, MI
  • Omaha, NE
The softer markets struggling to gain traction in terms of pending sales (but not necessarily in terms of price) include:
  • Austin, TX
  • Rochester, NY
  • St. Louis, MO
  • Baltimore, MD
  • Charlotte, NC
As with any monthly data, one should not get too excited about a single month reading. What is important is the general underlying trend after some of the monthly statistical noises. And the clear trend emerging is that homebuyers are ready to sign the dotted line where home prices have come down significantly. Some buyers are enticed by the bargain prices of foreclosed properties.

With pending homes retreating in July and the overly tight lending standards imposed by Fannie and Freddie through August, existing home sale closings are likely to have weakened in August. September closing figures, given the lag time between contract-signing and closing, could be similarly soft. Therefore, the short-term outlook is more of the same at essentially nearly 5 million home closings (at a seasonally adjusted annualized rate).

Yet the outlook could surprise on the upside. The fed takeover of Fannie and Freddie will be more affordable mortgages over the short-term. Homebuyers respond to lower home prices and lower mortgage rates. We know that there is a sizable pent-up demand, but people are preferring to sit tight and wait in the hopes of lower home prices later. But there is no national real estate market - aside from common mortgage rate conditions throughout the country - and some local markets appear to have already turned the corner and leaving risk-averse fence sitters behind. The frequent hearing of multi-bidding in California markets is indicating that the bottom in home prices could already have passed. In the job creating regions like Denver and Houston home prices look to steadily rise.

There are risks, however. The economy grew quite nicely at 3.3 percent in the second quarter (upwardly revised). But the country is producing more with fewer workers. Mortgage rates are historically favorable and likely to move lower still due to the fed takeover, but the return of buyer confidence is an unknown factor. Homebuyer tax credit is a net positive even after accounting for the repayment features, but the buyers may view it strictly as a loan (albeit one at zero interest) and may not act on that incentive. The inventory of homes at the national level at 11.2 months is high and will take time to trim.

It is safe to say we have hit bottom in home sales (which have been essentially stable for 12 months). I do not foresee another notch down. It is just the timing of when the pent up demand will reach the market place. Interest rates are favorable, homebuyer tax credit is available, conforming jumbo loans will become more accessible and affordable, and the job market will likely stabilize by the year's end given the continuing economic growth. Nationally, sales will pickup. The exact timing as to whether this will start to occur during the fourth quarter of this year or during the second quarter of next year, and as to how robust or modest the recovery will be are a bit cloudy. However, it is certain that existing home sales will be higher in 2009 compared to 2008.

Source: National Association of Realtors

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