Pending Home Sales Hit By Thor's Hammer

During the last month, there has been a great deal of bad news about housing, foreclosures, and default rates. And, there has been almost no good news to offset it.

Pending home sales added to the increasing pile of bad new. The National Association of Realtors said its index dropped sharply in January from December. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.6 percent to 90.4 from an upwardly revised 97.8 in December.

Lawrence Yun, NAR chief economist, said weather is likely to impact housing data. “January pending sales, though still higher than one year ago, remain much lower than expected given that a large number of potential buyers are eligible for the expanded home buyer tax credit.”

The effects of the poor trend in home sales is likely to have a profound effect on banks, particularly regional and community banks which hold large numbers of mortgages. The backlog of properties in foreclosure should bring buyers into the market because most of these homes are priced well below market. It does not appear that this is enough of an enticement for people who believe that home values will drop further over the next year. People who cannot afford their homes and cannot sell them are extremely high default risks.

The slowdown in housing sales, both for new and existing properties, also make it more likely that sellers will need to drop prices to attract buyers. Under those circumstances more mortgages will move underwater as downward pressure on prices remains a significant factor in the market.

Douglas A. McIntyre