Pending Home Sales Rise for Fifth Straight Month


The Realtors' pending home sales index is above its level when the economy collapsed last fall; gains are strongest in the South and West. But prices are still falling

Signed home-purchase agreements in the U.S. rose in June to the highest monthly level in two years, according to the National Association of Realtors' pending home sales index that was released on Aug. 4.

Pending home sales, considered a leading indicator because closings typically follow a month or two later, rose 3.6% in June, compared to May—the fifth consecutive monthly increase. That's the longest streak of increases in six years. The index has also surpassed its level when Lehman Brothers collapsed last September and unemployment began to skyrocket. Pending home sales were also up 6.7% compared to June 2008, and were higher than in any month since June 2007.

The index rose 0.4% in the Northeast, compared to the previous month, and climbed 0.8% in the Midwest, 7.1% in the South, and 2.9% in the West.

The pending home sales figure is only the latest indication that the housing market might be close or at a bottom. New home sales and resales were also up in June on a month-over-month basis, according to recent reports. While that's good news, economists say it's far too early to celebrate.

Overall Sales Still Down, Foreclosures Up

Paul Dales, U.S. economist for Capital Economics in Toronto, said sales of homes are down about 75% from the peak of a few years ago, and—even if the pending sales translate to closings—these numbers roughly represent a mere 15% recovery.

Meanwhile, sales prices continue to fall and foreclosures are climbing.

"It does sound good, but if you draw a chart and see how far it fell, it doesn't look like much of an improvement at all," Dales said. "This would have reversed a very small part of the plunge."

Another thing to consider is that pending home sales in recent months haven't been such a reliable indicator of closed sales because many contracts are falling through. The National Association of Realtors attributes this to appraisers coming up with valuations that are below the negotiated sales prices.

The group's president, Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said in a prepared statement that Freddie Mac (FRE) and Fannie Mae's (FNM) guideline revisions last month—which require lenders to use professional appraisers with local expertise—could help bring pending home sales in line with resales.

A Long Slow Recovery, Then Inflation?

The Appraisal Institute, however, says the appraisals are accurate. "The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today," the appraisal group said in a recent statement in response to the Realtors' association.

Dennis Torres, executive director of real estate operations at Pepperdine University's Graziadio School of Business & Management, says the rise in pending home sales is an encouraging sign. But Torres expects a long, slow recovery because of weak unemployment and new foreclosures in the pipeline. Prices will likely rise no more than 3% to 5% a year for the next few years, he said. Beyond that, he added, inflation could soar, driving up home prices.

Low interest rates, home prices, and government incentives make this the ideal time to purchase a primary home—as long as the buyer has a stable job and intends to stay put for a while, he said.

"Believe me, by 2015 everybody will say you're a genius," Torres said.

Gopal writes about real estate for BusinessWeek in New York.

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