Pending Home Sales Index Is Down 6.4%

The National Association of Realtors released its Pending Home Sales Index for January. Let's examine the release:

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.7 percent to 80.4 from a downwardly revised reading of 87.1 in December, and is 6.4 percent below January 2008 when it was 85.9. The index is at the lowest level since tracking began in 2001, when the index value was set at 100.

The NAR tried hard to pull some good signs out of the data but ending up promoting the tax buyer credit and improved affordability.

Lawrence Yun, NAR chief economist, said the downturn in the economy also weighed heavily on the data. “Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales,” he said. “We expect similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions and from the $8,000 first-time buyer tax credit.”

Mr. Yun, has long been a glass half full economist for the NAR. Are buyers waiting for the stimulus bill passage or for lower, more affordable prices?

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said it’s ironic with the weak housing market that affordability conditions have improved dramatically. “Housing affordability is at a record high – the buying power of a typical family has risen significantly,” he said. “With the drop in interest rates, a median-income family can afford a home costing $20,000 more than a year ago for the same monthly mortgage payment. With the strong housing stimulus, we are hopeful inventory will get trimmed and which will help prices stabilize in many areas by the end of this year.”

Is housing affordability really at a record high? I doubt it. A closer look at the NAR's Housing Affordability Index formula in footnote 2 shows some reason's for their affordability optimism.

The calculation assumes a downpayment of 20 percent and a qualifying ratio of 25 percent of gross income for mortgage principle and interest payments.

A 20% down payment ignores buyers who purchase with less down, a common occurrence during the past five years when mortgage programs with down payment terms of 10% and lower were widely available. The qualifying ratio of 25% is low and has an overall effect to increase the affordability index. As a comparison, the Obama Administration's Homeowner Affordability and Stability Plan that the NAR backs uses a percentage of 31% as a sustainable payment level.

Lower prices and affordability are important but what is key is the job market. Consumers concerned about their job security are more likely to remain in their current house than move-up to a different home. Without move-up buyers, the housing market's activity will grind lower.

What the NAR is not accepting is that housing sales will increase when prices come down to affordable levels and the consumer has a clearer picture of their future. Home buyers will ultimately return when they are confident about their employment status and income.

Stock position: None.

Comments

[John Lounsbury:]

I find it curious that the NAR characterizes the Pending Sales indicator as "a forward-looking indicator based on contracts signed in January,".

For new construction, this would be looking forward approximately six months or so to closings. For completed construction and existing home sales, this would be looking forward approximately 30-45 days to closings. Since less than 10% of current sales are new construction (and that includes completed new construction), the average of the forward look would be less than 1 1/2 months.

This is much closer to the customary lead time for something that would be considered a coincident indicator.

Mar 04 10:02 AM