The pending home sales index made a surprisingly strong leap in August. The biggest sales contract gains were in markets that had overheated and are now undergoing a sharp reduction in home prices. The upswing in activity occurred prior to the Treasury takeover of Fannie and Freddie in early September, which had lowered mortgage rates by about 50 basis points. So buyers were evidently entering the market to take advantage of sharply lower home prices.

The latest pending home sales index of 93.4 is a jump of 7.4 percent from the previous month and the highest reading since June of 2007. Compared to a year ago the index is up 8.8 percent. All four regions notched up gains. The West region was the strongest with a surge of 18 percent - with California, Arizona, and Nevada all showing solid gains. These states are also the ones with marked price declines and rising foreclosures. Florida also has been showing consistent gains over the past several months for the exact same reasons of buyers snatching bargain-priced homes. Southwest Florida regions (Cape Coral, Fort Myers, Sarasota, and Naples) had been early gainers, but the Miami area, Space Coast, Tampa, and Orlando are showing year-over-year gains and may have turned the corner as well. Rising momentum is occurring in the Washington D.C. suburbs. Rhode Island and Minneapolis are also showing early life signs.

There are still many local markets with continuing year-over-year declines, but the pace of declines have measurably slowed. Texas, North Carolina, Tennessee, Oregon, and Washington states are notables among the markets with continuing soft activity. The job market in all of these states has been holding up much better, but home prices have not fallen to attract buyers. Meanwhile, many would be buyers are no doubt facing challenges in obtaining a loan.

Pending home sales measures contract signings and not actual closings. So the August pending sales trend generally translates into closing figures in September and October. It is possible that some of the contracts may have fallen apart, even temporarily, given the credit market turmoil in September. The data coverage on pending sales is less extensive than closed sales as reported in Existing Home Sales. Therefore, one should not expect a direct one-to-one trend from pending to closing, though past trends have shown high correlations between the two.

Pending and closed sales both reflect distressed sales of short-sales (those home sales where the mortgage loan cannot be fully repaid) and foreclosures. If it is in the multiple-listing service (MLS) then it is captured. If sales are occurring outside the MLS such as some of the auction sales and bank-owned REOs then it is not captured in our data.

Based on a survey of REALTORS® in August regarding their most recent transaction, we estimate that about 40 percent of home sales are distressed sales. We are conducting survey now about who the buyers are. Investors, first-time buyers, vultures, or who?

Given all the focus on the U.S. housing market, mortgage availability appears to be improving despite the turmoil in the stock market and banking stocks. The Treasury, since the takeover, is forcing Fannie and Freddie to be not as overly stringent including the removal of fee on declining markets. It is a move not to lax standards, but to normal healthy underwriting criteria. The Treasury clearly and rightly understands that the global economy will not recover without a recovery in the U.S. housing market. The danger to the global economy of a U.S. housing market shooting downward is all too real and far too risky. Therefore, expect continued mortgage flow into the market place. As the recession of 2001 showed, low mortgage rates can be a powerful driver in bringing up home sales even as jobs are being cut. The unemployment rate of 6.1 percent still means that about 94 percent of job holders are able to respond to favorable mortgage rates.

This entry was posted on Thursday, October 9th, 2008 at 11:26 am and is filed under Politics .