This morning’s big economic news: pending home sales are up for a third month in a row. That’s an indication that home buyers are coming off the sidelines, deciding that even if the market isn’t at a bottom it’s close enough to wade back in. (My, how my metaphors mix!) This seems to be good news, especially since the increase is 1) substantial, and 2) more than economist-types had figured it would be. The pending-home-sales index, which measures contracts signed and is tabulated by the National Association of Realtors (NAR), went from a reading of 84.6 in March to 90.3 in April, an increase of 6.7 percent. The April figure is 3.2 percent above where it was a year ago—87.5 in April 2008.
So that’s happy. But then come the caveats. Shall we run through them?
1. The sample of pending-home sales is smaller than it is for existing-home sales—NAR’s other must-watch release—which means pending-home sales are more liable to jump around from month to month. Going up doesn’t mean staying up.
2. While a person signing a contract to buy a house has historically been a good indication that that person will, in fact, buy the house, that relationship has broken down somewhat in the current environment. Sometimes people sign a contract and then their mortgage falls through. Real estate pros insist it’s not as hard to lock down financing as everything thinks, but it’s still nowhere near as easy as it used to be. Sometimes people sign a contract to buy a house from a homeowner battling to stave off foreclosure, and then the bank doesn’t agree with the price, or doesn’t agree quickly enough, and the deal falls through. Nearly half of existing-home sales today are “distress” sales.
3. While there is decent sales activity among lower-priced homes, and increasingly among mid-pricers, too, there’s still not much going on with sales of more-expensive homes. The uptick in contracts likely has something to do with the new $8,000 tax credit available to first-time home buyers. Those are typically people buying smaller, starter homes. And that tax credit stops later this year—the support it’s giving the market is temporary.
4. A pick-up in sales doesn’t necessarily mean a pick-up in prices. We still have a lot of extra houses sitting around. A healthy housing market might have something like an eight-month supply of homes on hand—right now we’re closer to ten months. There’s still plenty of competition for buyers’ dollars. As Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note this morning: “Even if sales volumes rebound, home prices will keep falling under the weight of the massive inventory overhang.”
Exactly how excited should we be over this data then? On a scale of 1 to 10, I’d put an appropriate response at a 6.5.
Barbara!