NAR’s forward-looking pending home sales index slipped 4.4 percent in December, signaling a loss of momentum in contract signings, but the easing seems to be more about inventory shortages than weak demand, NAR Chief Economist Lawrence Yun says.
“Clearly to me the slowdown is due to the lack of inventory, the lack of supply,” Yun says, “because one can see the month’s supply situation variation. The month’s supply is the lowest in the West region and also it is in the West region that we see the highest price increase, clearly implying that it is a supply constraint slowdown rather than [a slowdown from] demand decelerating.”
Outside the West, the regions actually saw gains in contract signings in December, suggesting that the tight inventory in the West is a big enough issue that it’s dragging down the numbers measurably on a national basis.
Yun says builders are ramping up starts but they need to ramp up quite a bit more to make a dent in the inventory situation, because starts have been way down from what’s needed for several years now. So, builders are starting from a considerable deficit and their increased pace isn’t near enough what’s needed to make up for that lost ground.
NAR released its December 2012 pending home sales index today, January 28. The index is considered a leading indicator because it points to the pace of expected closings a month or two down the road.
If any more evidence is needed that home sales are recovering we have it in NAR’s latest pending home sales data, for November, which were released last week. The index is up for the third straight month and it’s reached its highest level, 104.6, in more than two years, when households were rushing to buy before the home buyer tax credit expired.
NAR Chief Economist Lawrence Yun says the strengthening housing market is based entirely on improving fundamentals: continuing economic growth (albeit at a moderate pace), improving jobs picture (again, no where near where we’d like it to be, but heading in the right direction), improving consumer confidence as home prices strengthen, and growth in the number of new households.
What’s encouraging about the latest data is the improvement is happening despite continuing difficulties households are having obtaining financing. Think of how much better the market would be if lenders would return to the underwriting standards they had in place before the boom, when the standards were reasonable and safe rather than overly restrictive as they are now.
The big concern today is what the federal government will do. In the short term, you have the fiscal cliff looming in just another day. If lawmakers can’t forge a budget agreement, hundreds of billions of dollars in federal spending cuts and tax hikes will take effect, which Yun says could send the economy into recession because it would take a 4-percent bite out of the economy.
In the longer-term, we have some unresolved regulatory issues coming up, including the qualified mortgage (QM) and qualified residential mortgage (QRM) rules, as well as the international banking protocol known as Basel III, which could impose new capital requirements on banks. These three matters taken together are casting quite a pall over lenders. They’re concerned they’ll have to hold back more capital and meet certain minimum underwriting requirements because of these rules (none of which has been enacted yet, but they could be enacted soon). So, how the federal government actually comes out on these rules could have a big impact on the availability and affordability of mortgage financing.
As of right now, though, the market is improving on its own, thanks to the slowly improving economy. Now we just have to see if there will be any shocks in the days and months ahead.
NAR’s forward-looking pending home sales index showed a very small rise in September, just 0.3 percent, but it’s one more data point to suggest the recovery is solidly underway even if it remains modest.
The rise represents the latest in a string of about half a dozen months in which pending sales have moved in a very narrow band, and that’s really what’s most informative about the latest release: it suggests that the underlying factors in the improved market are systemic and not due to just one or two transient factors.
In an interview yesterday, NAR Chief Economist Lawrence Yun said he expects home sales to be 10 percent higher than in 2011 at the end of the year, which would put home sales at close to 5 million, and prices to continue rising. Right now they’re at a median $183,900 on a national basis.
Thanks to slow but steady job growth, the improved market is expected to carry into 2013. “I wish job creation could happen much faster, but nonetheless [there’s been] nearly 5 million job creation and this is supporting the housing market this year and it will continue to support it next year,” he says.
Yun also said rising rents are helping to bring new buyers into the market. He cited NAR’s latest member survey in which 60 percent say they see rents rising in their markets, compared to 10 percent who see rents falling. That rental rate outlook should convert some renters into buyers in the coming months. “It’s a rising trend, and when the rents rise, that means that some of the renters will want to become owners, so there will be additional stimulus for the home sales,” he says.
In the 2-minute video above, Yun talks about the latest pending sales figures. Pending sales are based on contract signings, not transaction closings, so they’re considered a leading indicator—that is, they point to where sales are expected to be 2-3 months down the road.
Coverage in much of the media of NAR’s latest pending home sales index, whch was released on Monday, has focused on the improvement we’ve seen over last year.
The Wall Street Journal, for example, in its front-page “Vital Signs” info graph for today (March 27, 2012), features data from NAR’s pending home sales index and says “Americans are buying more homes this year than in 2011.”
Bloomberg Businessweek says, ”Pending sales of U.S. existing homes [are] at near two-year high.”
Focusing on the improvement over last year is positive, because month-to-month fluctuations can make it hard to see the big picture. In yesterday’s NAR release, the forward-looking indicator was actually down, although almost imperceptibly—0.5 percent—but, as the news coverage said, it was up a strong 9 percent from a year ago.
Even with the monthly dip, the index suggests markets are in an extended period of stabilization. On a national basis, sales have been at about the same level since 2009, sometimes moving up a bit and sometimes dropping back down, but always hovering in the same territory, roughly 4.2 million sales. But for the last two months they’ve been at about a 4.6 million pace, which, if that persists, would be the highest level in five years, according to Lawrence Yun, NAR’s chief economist.
Yun thinks the big-picture view is looking up after what’s been a tough several years, in large part because of what’s happening in the broader economy. Rental rates are rising, making home ownership more attractive, jobs are heading up, and the stock market has been strong, too. What’s more, the improved sales picture is broad-based. Unlike last year, when sales improved for a while because of strong activity in a few markets, like Las Vegas, this year improvement is happening in all parts of the country: Pittsburgh, Syracuse, Dallas, Kansas City, Minneapolis, Seattle, and so on.
Maybe most important of all, the improving economy might help unleash the pent-up housing demand we’ve been waiting for. Yun has been talking about this for several years now. The population has continued to grow (it’s around 310 million now, maybe a little more), but home sales have been stuck at levels we last saw 10 years ago, despite the country having more people.
Its not just that people are renting rather than buying; it’s that young people haven’t been moving out and forming new households or they’re moving out and doubling up with friends. Yun thinks people might have the confidence now to start forming households, setting the stage for improved housing conditions in the years ahead.
NAR released its latest pending home sales index figure last week and for the second month in a row the index is up. But more than that, the index has broken 100. This is significant because the only time since the housing boom collapsed that the index has broken 100 is when the home owner tax credit was in effect. The fact that the index has returned to that level a year since the credit has been in effect means the housing market is strengthening completely on its own, without any stimulus.
NAR Chief Economist Lawrence Yun is upbeat about 2012 because in a number of areas indicators are pointing upward. Not only are home sales up but housing starts are up and home prices are stabilizing in many markets and heading up in some. In areas where they’re still down, the declines aren’t that great. More fundamentally, broader U.S. economic signs are looking positive, including the all-important jobs picture. About 100,000 job are being created a month, and that could rise to 150,000—still not a quick enough pace to get us back to where we were before the downturn but the headwinds are in the right direction.
In what might finally be a sign that home sales are poised for a turnaround, NAR’s forward-looking pending home sales index jumped 10.4 percent in October from the previous month and is also up significantly on a year-over-year basis. Although it’s too soon to tell whether the gain will be sustained, there are trends berewing in the market that suggest it will be.
For one thing, rental rates are increasing. Historically, there’s typically been a strong correlation between rising rental rates and rising home prices. That relationship has broken down in the past few years because of the severity of the downturn in the housing market. But with rental rates now well into long-term gains, pressure is mounting for renters to jump to home ownership if only because it’s becoming cheaper to buy than to rent in a lot of markets and at a lot of price points. Of course, the hurdles to obtaining financing remain a big stumbling block, and in fact that might be a good part of the reason there’s been so much divergence between NAR’s pending sales index and actual closings.
We’ve been seeing that divergence for the last couple of years. Pending home sales will go up but actual closings won’t follow suit as closely as they have in the past. We can’t know all the reasons for this, but NAR surveys of its members have suggested that agents are seeing a lot of closings collapse because buyers can’t get financing.
In the 4-minute video above, NAR Chief Economist Lawrence Yun talks about the latest pending sales figures and what might be coming down the road, in part because of rising rental rates.
By Brian Summerfield, Online Editor, REALTOR® Magazine
In July 2008, in the heat of the presidential election, McCain campaign advisor and former U.S. Senator Phil Gramm caused some controversy when he seemingly characterized the United States as “a nation of whiners” who were plagued by a “mental recession.” In other words, the economic problems of the time were all in people’s minds.
Events since then would appear to controvert Gramm’s argument. The economic troubles manifesting themselves at the time—including considerable overleveraging among major banks, increasing unemployment, and rising mortgage defaults—were not just figments of our collective imaginations.
However, in spite of his flawed analysis, Gramm may have been on to something with his concept of a mental recession. In fact, we may be heading into one right now. Continue reading »