Pending Home Sales Signaling Growth

by: Markos Kaminis
The National Association of Realtors’ (NAR) regular monthly release, showing pending home sales, indicates the continuation of improvement in the real estate market in March 2011. While growth was fragmented, and as activity remains just mildly positive, the realtor group affirmed its forecast for growth in housing in 2011.
Slow and steady wins the race. The sprinting hare overexerts himself and tires, and the sure tortoise passes him lying in exhaustion. This is illustrated in every asset bubble, driven by hare-infatuated capital, and it was the case again in the housing bubble of the last decade. The good news is that the death of the hare is behind us and the tortoise is now making his way, progressing.
The NAR’s Pending Home Sales Index increased by 5.1% over the revised lower February mark, reaching 94.1 in March. Still, this index and all other real estate metrics that have been recently reported show a level of activity short of the prior year; the Pending Home Sales Index was 11.4% below the 106.2 March 2010 mark. The NAR points out why, reminding investors that last spring’s market was inflated by the deadline to qualify for the First Time Homebuyer Tax Credit. As we approach the summer-low comparables for real estate activity though, year-over-year comparisons should show improvement like the month-to-month comparisons reflect currently. Understanding this allows for the digestion of the NAR’s full 2011 forecast for 5% to 10% existing home sales growth.
Monthly activity has been choppy, but as we look back at the change since last June, we find pending home sales have increased by 24%. A closer inspection of regional activity also serves to blur observation of general growth. The Northeast, which was burdened by heavy snowfall through January and into February, saw pending home sales slip 3.2% in March. Many theorize that the sales process, which includes prospective buyers walking through homes, was set aback by the extreme weather conditions this past winter. The Midwest, where weather again is certainly at issue, only saw a 3.0% increase in March. But in the West and South, where weather is more favorable and where the population of the nation tends to migrate, we saw better growth rates. The Pending Home Sales Index for the West rose by 3.1%, but is closer to prior year levels than other regions. In the South, growth spurted by 10.3% in March.
One troubling trend, however, is that the percentage of distressed property transactions is increasing, reaching about 40% last month. This serves to lower the average sale ticket, and weighs on overall pricing comparisons. However, these properties are also weeding themselves out of the market and serving to help place a floor for housing to grow from. On the positive, the weaker dollar resulting from Federal Reserve policy and other factors, serves to draw foreign demand for U.S. assets. Thus, while domestic demand is hampered by high unemployment and tighter lending standards, a wider door is opened to foreign investors.
In conclusion, this report serves as yet another signal that a floor in housing seems set. Barring further disruption to the economy, perhaps driven by rising fuel, food and other prices, or other unforeseen events, housing seems to offer an opportune alternative investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.