Pending Home Sales, Trying To Catch A Falling Knife

September 2, 2010 by Douglas A. McIntyre

Assume for the the time being that the housing crisis will last well into 2011, that foreclosures will rise, and the number of underwater mortgages will not improve from the current 11 million level. The situation could get worse before its gets better if the August unemployment figure are weak.

Following a sharp drop in the months immediately after expiration of the home buyer tax credit, pending home sales have modestly risen, according to the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator, rose 5.2% to 79.4 based on contracts signed in July from a downwardly revised 75.5 in June, but remains 19.1% below July 2009 when it was 98.1. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, cautioned that there would be a long recovery process. “Home sales will remain soft in the months ahead, but improved affordability conditions should help with a recovery,” he said. “But the recovery looks to be a long process. Home buyers over the past year got a great deal, and buyers for the balance of this year have an edge over sellers. For those who bought at or near the peak several years ago, particularly in markets experiencing big bubbles, it may take over a decade to fully recover lost equity.”

Homes are more “affordable” by the month as prices move down and mortgage rates remain at historically low levels. But, who wants to try to catch a falling knife?

Douglas A. McIntyre