The Mirage of Pending Home Sales Increases

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According to the latest data from the National Association of Realtors (NAR), pending home sales rose 4.1% in March to a Pending Home Sales Index reading of 101.4, up from a revised 97.4 reading in February. The index reflects contract signings for home purchases and leads actual sales data by about 45 to 60 days.

The NAR’s chief economist said:

The housing market has clearly turned the corner. Rising sales are bringing down inventory and creating much more balanced conditions around the county, which means home prices will be rising in more areas as the year progresses.

That’s the view through rose-colored glasses, and may be ignoring the NAR’s own data on contract cancellations. Nearly a third of realtors surveyed in March were having contract cancellation problems, according to the Washington Post. Low appraisals topped the list of issues:

Part of the problem is the excessive use of price-depressed foreclosure sales chosen as “comparables” to value non-distressed houses under pending contracts. In addition, some appraisers are inexperienced and unfamiliar with local pricing trends, and they go far beyond their normal duties.

Lenders also require sky-high FICO credit scores and documentation requirements are stiffer as well. A signed contract loses some of its predictive power given the number of things that lay in wait to ambush it.

And although home prices continue to fall, as measured by the S&P Case-Shiller housing price index, new home sales also continue to fall according to data from the US Census Bureau.

Mortgages are cheap too. Fannie Mae reported today the a 30-year fixed rate mortgage averaged 3.88% for the week, down from 4.78% for the same week a year ago. Of course the only way to get one of those loans is to prove that you don’t need the money.

One contributing reason for the mixed housing signals we’re getting is likely the result of a lot of cash buyers who are purchasing so-called real-estate owned (REO) properties for investment purposes at very low prices. We’ve noted before the entry of some private equity firms into this area. Because these firms are buying in quantity and for all cash, lenders are not as picky about appraised values. They’re just happy to get rid of the property.

It is difficult to believe that the US housing market is truly taking a turn for the better. See our story from earlier today on the latest Gallup data on home ownership. New construction projects are increasing, but those are largely for multi-family buildings. Single-family home ownership may be on its way to losing its place at the heart of the American dream.

Paul Ausick

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