Some positive news for home sales ….. finally!

Finally some positive new on housing demand after the sharp declines and record lows in home sales experienced in recent months, with the National Association of Realtors (NAR) release of the Pending Home Sales Index (PHSI) reporting that contracts signed on existing homes ticked up in July, rising 5.2% to 79.4. This follows a sharp downturn in pending homes sales in May and further weakening in June 2010.  The upturn in the PHSI was broadly based, with an improvement in the index in all regions.  The strongest bounce was observed in the West, up 11.6%, with Northeast (+6.3%), Midwest (+4.1%) and South (+1.2%) also increasing.

Although too early to be definite, it does appear that the payback period associated with the expiration of the homebuyer tax credit is behind us.  The July pending home sales indicate that by September 2010 we can expect a turn-around in existing home sales and a return to a steadily (albeit slowly) improving path. This is consistent with NAHB’s forecast of weak housing demand in the third quarter followed by a recovery in the fourth quarter of 2010.  With the economy and the employment situation expected to improve in 2011 and 2012, we can expect housing demand to build momentum, with substantial gains in home sales. By the fourth quarter of 2012, the NAHB anticipate that existing home sales will return to pre-recession levels.

The NAR pending home sales index (PHSI) is a leading indicator of housing market activity. Although existing home sales are based on closings, the PHSI is based on contract signed. Sampling by the NAR shows that over 80% of all pending home sales are closed within two months of the contract being signed – with the bulk of the remainder closing in months 3 and 4. There are also a small proportion of contracts signed that are cancelled. The NAR noted recently that the average closing period has increased in recent months due to the large volume of short sales and foreclosures in the market and a more thorough loan underwriting process. Unlike existing home sales which measures total number of units sold, the PHSI is an index based on the average level of contract activity in 2001 (i.e., base 2001=100).

The attached graph shows the close relationship between pending home sales and existing home sales.  While there is not a direct relationship, there is a clear trend, with existing home sales following the PHSI with a two month lag.  The shift from the trend in May and June is due to the increase in the closing period associated with the large volume of short sales and foreclosures.

The sharp downturn in existing home sales in July was predicted by the pending home sales data in May. The PHSI of June indicates that we can expect August existing home sales (released in September) to remain soft, but the improvement in July points to a turn-around in existing home sales in September.



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