Pending Home Sales, Prices Continue to Rise

The Mortgage Corner

Those who doubt the real estate recovery aren’t paying attention to the latest sales’ data. We reported last week the Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.3 percent to 106.0 in April from 105.7 in March, and is 10.3 percent above April 2012 according to the National Association of Realtors. The data reflect contracts but not closings.

The doubters are mainly those who believe the Federal Reserve is artificially stimulating home sales by keeping interest rates so low, such as Barron’s conservative economist Gene Epstein. “Why barely one cheer, then (for the housing recovery)? Because this housing recovery has been so stuffed with government steroids, you wonder if it could make it on its own if these drugs were withdrawn.”

But lower interest rates are necessary when consumers buying power has shrunk so badly due to the Great Recession. That is to say, such low interest rates make housing more affordable for the majority of home buyers. Rates will rise of their own accord when incomes (and so inflation) begins to rise, and business activity heats up. Interest rates are really controlled by the demand for money, which increases when spending increases.

Home contract activity is at the highest level since the index hit 110.9 in April 2010, immediately before the deadline for the home buyer tax credit.  Pending sales have been above year-ago levels for the past 24 months.

Graph: Econoday

Lawrence Yun, NAR chief economist, said a familiar pattern has developed.  “The housing market continues to squeak out gains from already very positive conditions.  Pending contracts so far this year easily correspond to higher closed home sales in 2013,” he said.  Total existing-home sales are expected to rise just over 7 percent to about 5 million this year.

This is huge, and though inventories are rising, it’s not enough to keep prices from continuing to rise. “Because of inventory shortages, higher home sales will push up home values to the highest level in five years,” Yun said.  The national median existing-home price should increase close to 8 percent and exceed $190,000 in 2013.

And the S&P Case-Shiller Home Price Index reports the year-on-year increase of 10.9 percent is the first double-digit gain since May 2006.

Graph: Econoday

The bottom line is activity in the housing sector is heating up with April existing-home sales rising 0.6 percent to an annual rate of 4.97 million. Supply, which had been very tight, poured into the market during April with 230,000 units added to lift the months supply to 5.2 from 4.7 months. The median time for a house on the market fell dramatically, to 46 days vs 62 days in March.

And sellers are getting their price based on the report's price data. After jumping 6.2 percent in March, the median price rose another 4.8 percent in April to $192,800 which is the highest level of the recovery. We should note that price data in this report, which are not based on repeat transactions, are often volatile. But who can argue with a double digit year-on-year median gain at 11.0 percent?

Harlan Green © 2013

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