Pending Home Sales Pop

Spurred by a desire of home buyers to get in under the wire of the $8,000 “first time” homebuyer tax credit that expires at the end of November, the National Association of Realtors' pending sales index jumped 6.4% to a reading of 103.8 from 97.6 in July. This was the highest reading since March of 2007.

Another factor in the increase is the rise in the number of short sales (people selling the house for less than the amount of the mortgage, with the OK of the bank holding the mortgage) which involve a lot more paperwork and thus a longer time between the agreement to buy and the actual closing. Still, this is some more evidence that we have turned the corner in the housing market.

That turn has been helped along by an extraordinary amount of government assistance. Not just the tax credit, which is not particularly well targeted and ends up giving a lot of money to people who would have probably bought a house anyway (but perhaps not this month), but also the Fed buying up just about every scrap of mortgage paper being issued. This has helped to hole mortgage rates way down, and thus stimulate housing sales.

The FHA has stepped into the shoes of the crazy mortgage brokers who were doing those "zero-down" mortgages a few years ago, by offering mortgages with only a 3.5% down payment, and allowing the tax credit to be used as the down payment. In areas where home prices are falling (until very recently that was most of the country) it means that the homeowner will almost instantly be underwater.

Underwater homeowners are at extremely high risk of default. Look for a massive bailout of the FHA within the next two years. My guess is that is will be measured in the hundreds of billions, but hey -- been there, done that.

Gains were widespread regionally, on both a month-over-month and year-over-year basis. The biggest gain was seen in the West, where pending sales jumped 16.0% for the month and are up 22.3% year over year. The next strongest region was the Northeast, which saw an 8.2% increase over July and is up 12.0% year over year. The Midwest enjoyed a more modest 3.1% rise on the month and is up 8.2% year over year.

The extremely important South region was the laggard, with a rise of just 0.8% for the month. Pending sales in Dixie are 8.2% higher than a year ago.

There is not an exact correspondence between pending sales and the existing home sales for the following month, in part because the pending sales index is based on a much smaller sample, and sometimes a deal falls through. Deals falling apart have become more common over the last few years than they used to be.

Still, this is an indication that existing home sales will probably be fairly robust in September and October. The big question is what happens when the tax credit expires and the Fed just stops buying all that mortgage-backed paper (let alone when it tries to reverse course and sell it).

In the meantime, the higher level of existing home sales will help to clear out some of the inventory and stabilize the market. That in turn should prevent housing prices from falling much further, and keep at least a few homeowners above the rising flood.

Existing home sales do not do nearly as much for economic growth as new home sales, but then again they do not add to the overall supply, either. The economic effects are more indirect. When they rise, they result in higher commissions for realtors, and more revenues for title insurance companies like First American (FAF) and Fidelity National Financial (FNF). People also tend to redecorate and paint when they move to a new place. This helps firms like Sherwin Williams (SHW) and Ethan Allen (ETH).

All things considered, the increase in pending home sales is a good thing, but I am not sure it will last. So we should enjoy it while it is here.

Comments

[Russ Wetherill:]

We have certainly turned "a" corner or "a" page in the housing downturn saga, but it remains to be seen whether "the" corner has been turned and sustainable increases in housing prices and housing sales will continue.

I expect a downturn in sales when the tax subsidy expires in November. So does the National Association of Realtors which has been lobbying congress to extend or increase the credit. Just like the drop in car sales followed the expiration of the 'cash for clunkers' program, a drop in home sales will also occur.

Oct 01 02:25 PM

[The Geoffster:]

The government's response to the housing crisis reminds me of the fellow who treated his headache with a hammer. When his headache didn't go away, he just hit himself harder.

Oct 01 02:44 PM

[conceptwizard:]

The Government as always is just increasing the problem at the expense of the taxpayer. Poor leadership, poor decisions based on bandaid triage with no lasting or meaningful substance other than kicking the can further down the road.
Throwing oil on the housing fire will increase damage later. We learned nothing and by doing nothing meaningful we will experience a much worse fate in the future.

Oct 01 03:31 PM

[Tony Petroski:]

The author:

"Still, this is an indication that existing home sales will probably be fairly robust in September and October. The big question is what happens when the tax credit expires and the Fed just stops buying all that mortgage-backed paper (let alone when it tries to reverse course and sell it)."

What happens when the tax credit expires? Sales will go way down.

Glad to be of service.

Oct 01 05:47 PM

[Gary A:]

I don't understand why Zacks would write this article. I mean, this is a head fake recovery. And those who buy now may be buying at prices that are still too high. This will just increase the coming train wreck.

So, go on, I dare you to buy the homebuilders based on this article.

Oct 01 08:51 PM

[LCM:]

the most absurd assumption is that "companies like Ethan Allen" will be helped....the majority of purchases at such retail establishments were using home equity lines to buy such big ticket items....well that option isn't readily available anymore...that will actually HURT companies like Ethan Allen going forward. Not mention they opened way too many new stores during the last 5 years....there will be a major contraction in number of locations. It's already happening, they're just hiding it from shareholders and investors... Kathwari is very good at painting a "rosey" picture...

Oct 12 02:16 PM