Pending Home Sales Rose Two Percent in January

The Pending Home Sales Index grew by two percent during January from the previous month to 97.0 — considerably above the 1.1 percent growth forecast by economists.  The index has risen eight percent when compared with one year ago.  Relaxed mortgage lending criteria, historically low interest rates and an improving labor market contributed to this growth in pending home sales, said Ian Shepherdson, High Frequency Economics‘ chief U.S. economist.  The index measures the quantity of sales contracts signed on existing home sales.  Created by the National Association of Realtors (NAR), it’s considered a leading indicator that predicts growth throughout the broader residential market.

“Given more favorable housing market conditions, the trend in contract activity implies we are on track for a more meaningful sales gain this year,” said NAR chief economist, Lawrence Yun.  “With a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”  Pending home sales rose impressively in the Northeast and South, but declined in the Midwest and West.

“Housing demand has bottomed, and we should see some gradual improvement in sales,” said Yelena Shulyatyeva, an economist at BNP Paribas, who predicted a two percent gain in pending sales.  “The dark side of the story is still the oversupply and the expected pickup in foreclosures.  That’s what policymakers really need to think about.”  On the downside, lower appraisals and rejected mortgage applications have broken down more deals.  In January, one-third of Realtors said they experienced contract failures, an increase when compared with the nine percent who said so one year ago, according to the association.

Existing home sales rose to 4.57 million a year in January.  While it was the best report since May of 2010, distressed properties constituted the largest portion of all purchases since April.  Additionally, the median price fell two percent when compared with January of 2011.  “We’re optimistic,” Doug Yearley, CEO at Horsham, PA-based Toll Brothers, said.  “We have orders that are up significantly.  We’re seeing deposits up, we’re seeing traffic up.”

Borrowing costs are still affordably low. The average rate on a 30-year fixed loan was little changed at 4.09 percent in mid-February, , according to the Mortgage Bankers Association. It averaged 4.05 percent the week of February 3, its lowest reading on record since 1990.

Another reason why home sales may be on the rise is because of an April deadline for higher mortgage application fees for Fannie Mae and Freddie Mac-backed home loans.  The government-controlled mortgage buyers own or guarantee approximately 50 percent of all U.S. mortgages and 90 percent of new loans and have been telling customers to submit their applications now.  Even with the good news, analysts warn that the damage from the housing bust is deep and the industry is years away from full recovery.

According to Paul Dales, senior U.S. economist at Capital Economics, prices are unlikely to stop falling until the second half of 2012, having dropped 34 per cent over the last five years.  This, and the decline in the supply of homes on the market, which fell last month to the lowest since January 2006, will provide support to the housing recovery.