Pending Sales Up 6.3% in April

Daily Real Estate News June 9, 2008

A modest gain in the level of home sales is possible over the next couple months, and an improvement is forecast for the second half of this year as more buyers are able to access affordable mortgages, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in April, rose 6.3 percent to 88.2 from a reading of 83.0 in March. It’s the highest index since last October, but remains 13.1 percent lower than April 2007, when it stood at 101.5.

Lawrence Yun, NAR chief economist, says pending sales contracts have picked up notably in areas undergoing significant price drops.

“Bargain hunters have entered the market en masse, especially in areas that have experienced double-digit price declines, but it’s unclear if they are investors or owner-occupants,” he says. “Sharp price reductions are leading to a quicker discovery of price equilibrium points. The West is already seeing year-over-year gains in pending contracts.”

The Pending Home Sales Index in the West rose 8.3 percent to 98.8 in April from March, and is up 4.0 percent from April 2007. In the Midwest, the index jumped 13.0 percent to 83.7 in April but remains 13.1 percent below a year ago. The index in the South increased 4.6 percent to 88.8 but is 22.5 percent below April 2007. In the Northeast, the index declined 1.9 percent in April to 79.3 and is 12.2 percent below a year ago.

Here are some other market predictions from Yun and NAR:

• Affordability getting better. NAR’s housing affordability index has been trending up this year and is projected to rise 15 percentage points to 128.0 for all of 2008. “It appears that more buyers are realizing they can take advantage of a favorable combination of mortgage interest rates, home prices and family income,” says NAR President Richard F. Gaylord. “Overall affordability conditions are the best we’ve seen since the middle of the housing boom in 2004, but with far more choices and much less pressure than buyers experienced four years ago to make an investment in their future. Recent declines in mortgage rates on conforming jumbo loans and a return to sound but not overly stringent underwriting standards will permit more people to qualify for a loan.”

• Mortgage rates to go up. “Although mortgage interest rates will remain historically favorable, they will start to steadily inch up,” Yun said. The 30-year fixed-rate mortgage should rise gradually to 6.3 percent by the end of this year, and then hold at that level for most of 2009.

• Demand for homes only rising. Yun said the underlying fundamentals point to a pent-up demand. “Home sales are at about the same level as they were 10 years ago, yet the population has grown by 25 million people and we have over 10 million more jobs,” he said. “The housing market has been underperforming by historical standards, partly because buyers were hampered by mortgage availability issues, but that’s improved and an upturn is more likely. On the other hand, it’s unclear what role consumer confidence will play in the coming months.”

• EHS to see healthy gains in ’09. Existing-home sales should increase from an annual pace of 5.05 million in the second quarter to 5.83 million in the fourth quarter. For all of this year, existing-home sales are expected to total 5.40 million, and then rise 6.3 percent to 5.74 million in 2009. “Sales gains will be greatest in areas that underwent sharp price declines,” Yun said.

• Prices to stabilize in second half of this year. After unprecedented home price declines in the first half of the year, many markets can anticipate stabilizing price trends in the second half. The aggregate median existing-home price is likely to decline 8.4 percent in the first half of this year, and then begin to stabilize in the second half before rising 4.4 percent next year to $213,900. “Policymakers need to be attentive to the fact that many homeowners have seen a reduction in housing equity, or are in an ‘underwater’ situation. More needs to be done on the policy front to alleviate hardships and bring fence-sitters back into the marketplace,” Yun says.

• New-home sales slow to recover. New-home sales will probably fall 31.7 percent to 529,000 in 2008 before rising 12.5 percent to 595,000 next year. Housing starts, including multifamily units, are projected to drop 27.2 percent to 987,000 this year, and then slip 0.6 percent to 980,000 in 2009. “Rising construction costs will provide less room for price cuts on new homes,” Yun said. The median new-home price is forecast to decline 3.1 percent to $239,500 in 2008, and then rise 5.4 percent next year to $252,400.

• A better economic picture. Yun sees an improving economy. Growth in the U.S. gross domestic product (GDP) should be 1.7 percent in 2008 and 2.0 percent next year. The unemployment rate is estimated to average 5.3 percent this year and 5.6 percent in 2009.

• Inflation growing. Inflation, as measured by the Consumer Price Index, is expected to be 3.6 percent this year and 2.4 percent in 2009. Inflation-adjusted disposable personal income should grow 1.4 percent in 2008 and 2.5 percent next year.

Existing-home sales for May will be released June 26; the next forecast and Pending Home Sales Index will be released July 8.

— NAR