Pending Home Sales

The Lehmann Letter ©

Today’s report on pending home sales (http://www.realtor.org/press_room/news_releases/2009/02/pending_home_sales_show_healthy_gain ) by the National Association of Realtors is moderately upbeat:

“Pending home sales increased as more buyers took advantage of improved affordability conditions, according to the National Association of Realtors®. Big gains in the South and Midwest offset modest declines in other regions.

“The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, rose 6.3 percent to 87.7 from an upwardly revised reading of 82.5 in November, and is 2.1 percent higher than December 2007 when it was 85.9.

“Lawrence Yun, NAR chief economist, said the index shows a modest rebound. “The monthly gain in pending home sales, spurred by buyers responding to lower home prices and mortgage interest rates, more than offset an index decline in the previous month,” he said. “The biggest gains were in areas with the biggest improvements in affordability.”

“NAR’s Housing Affordability index rose 10.9 percent in December to 158.8, the highest on record.2 The HAI shows that the relationship between home prices, mortgage interest rates and family income is the most favorable since tracking began in 1970.

“”Significant uncertainty still clouds the housing market despite improved affordability conditions. For a sustainable housing market recovery and, hence, sustainable economic recovery, we need a significant housing stimulus and mortgage availability for qualified borrowers,” Yun added.”

Unfortunately, the pending home sales’ index fluctuated between 83.0 and 93.5 over the past year, so December’s 87.7 number is hardly red hot. There is no upward trend.

But the press release’s announcement that housing affordability is now higher than at any time since 1970 is sad. Home sales and building remain in the ditch despite a strong combination of low home prices and mortgage interest rates relative to household income (i.e. top affordability). The housing market remains in the throes of a severe asset deflation. Home prices continue to tumble because potential buyers hold back in the belief that prices will fall further. This aids and abets the foreclosure crisis. It’s tough to build and buy in that climate.

What could shake the malaise? A foreclosure amnesty + legislation that gave the courts the right to re-write mortgage contracts in household-bankruptcy proceedings + legislation that assisted banks whose mortgage assets had been written-down in those proceedings. That would do more than anything to stop the foreclosures and the asset deflation and stabilize home prices. Then new-home sales and building could begin to recover.

© 2009 Michael B. Lehmann