Thursday, April 26, 2012

Actual home purchases are not keeping up with pending home sales

Today we saw stronger than expected pending home sales in March from the National Association of Realtors.
Bloomberg: The index of pending home purchases rose 4.1 percent to 101.4, the highest level since April 2010, after a 0.4 percent gain in February that was revised from a previously estimated 0.5 percent drop, the National Association of Realtors reported today in Washington. The median forecast of 43 economists surveyed by Bloomberg News called for a 1 percent rise in the measure, which tracks contracts on previously owned homes.
This is great news for the housing market, but there is a problem. Typically the pending home sales index leads existing home sales by a month or two. But recently the actual closings have not kept up with this index and the gap has gotten wider. Here are the two indices from 2002.

And here are the same two indices over the past year.

It shows that many pending transactions never make it to closing. The only explanation for this is the persistence of tight credit conditions in the housing market, with buyers unable to obtain adequate financing in order to close. This is in spite of record low mortgage rates.

Within a month or two we should know if there have been improvements in the rate of closings. If so, we should see existing home sales pick up sharply. But given the recent history of the two indicators, this improvement is far from certain.
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