December 3, 2010
The unexpected surge in the number of people who signed contracts to purchase homes in October is the first positive news in the housing market for weeks: The Pending Home Sales Index jumped to 89.3 (on a scale of 100), an increase of more than 10 percent from September, according to the National Association of Realtors (NAR). Experts had expected an index reading of 80.1.
“The housing market is clearly in a
recovery phase and will be uneven at
times, but the improving job market and
boost to household formation will help
the recovery into 2011.”
“It’s welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels,” said Lawrence Yun, NAR’s chief economist. “The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011.”
The fact that the contracts were signed while some major banks halted all foreclosure sales is encouraging, said Paul Dales, an economist with Capital Economics. It appears that the “robo-signing” scandal hasn’t had a major impact on homebuyers’ interest in properties.
A Move in the Right Direction
The index shows an improvement from one year ago, when pending home sales fell 20.5 percent across the country. Home-buying has been rising gradually since June, with the exception of September’s unexpected drop to 80.9, which drew doubts about the pace of the housing market recovery. First-time buyers were motivated to make offers before the initial contract deadline for the homebuyer tax credit expired earlier this year.
“This trend will strengthen in the coming months, as buyers step up to reap gains of high housing affordability and low mortgage rates,” said Sunayana Mehra, an economist with Moody’s. The main push on housing sales may be record low mortgage rates and home prices, although mortgage giant Freddie Mac reported today that rates were higher this week; the average rate for 30-year fixed loans rose to 4.46 percent, from 4.40 percent last week. This was the third week in a row that mortgage rates were up, although they’re still close to historic lows.
While the housing data signals marked progress, economists remain firm that a weak housing market will continue to hold back the wider economic recovery; they say the positive data isn’t robust enough to trigger a new buying boom. The Pending Home Sales Index still remains almost 20 percent below its level for 2009, which was the highest level since May 2006, when it hit 112.6. The high unemployment rate of 9.8 percent, along with tight credit conditions, suggests that an upward trend will be gradual.
“Today's data are encouraging, but are not a game-changer,” Dales said. “The housing market will remain a drag on the overall economy for some time yet.”
With more signed contracts, it’s interesting to note changes in what Americans are looking for. According to a new survey by New York-based Relocation.com, more Americans prefer smaller homes in the suburbs; the 3,000-square-foot “McMansion” of the ‘80s and ‘90s may finally be on its way out. The survey found that almost half the respondents indicated that their ideal home size ranged from 1,000 to 1,999-square-feet, while less than a third said they wanted a 2,000 to 2,999-square-foot home.
In a separate report, RealtyTrac, which watches foreclosures, found that 25 percent of all U.S. residential sales were of distressed homes — including those in default, scheduled for foreclosure auction, or real-estate owned (REO) in the third quarter. As the inventory of distressed properties increases, a drop-off in property sales means that it's going to take longer for these properties to find buyers, ultimately prolonging the housing market recovery.
What is most remarkable from the third-quarter report is the 41 percent discount on bank-owned properties, and a 32 percent discount overall. Between those discounts and historically low interest rates, there should be more purchasing than we’re seeing, said Rick Sharga, senior vice president at RealtyTrac.
Will the housing market continue to improve into the New Year? “Our projection is that it will take until the end of 2013 to get through most of the inventory of distressed properties,” Sharga said. The most likely scenario, he says, is that housing will stabilize in 2011, be flat in 2012, improve a little in 2013, and start to experience real growth in 2014.