NAR Releases Pending Home Sales & Adds Spin

A: What else is new right! Anyway, lets take a look at this leading indicator in the pending home sales and see how activity is doing across the country as prices fall. As usual, the NAR puts their positive spin on the number as Lawrence Yun now expects a strong final quarter of 2008; 'The slip in pending home sales implies we're not out of the woods yet, though an era of successive deep sales declines appears to be over,' Yun said. Ahh, very comforting Mr. Yun!

February Pending Home Sales (via Bloomberg)

* Down 1.9% from January
* Down 21.4% from year ago

According to Bloomberg:

The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating the U.S. real-estate recession will extend into a third year.

The National Association of Realtors' index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today.

Economists had forecast the index would fall 1 percent from an unchanged reading previously reported for January, according to the median of 29 estimates in a Bloomberg News survey. The pending figures are considered a leading indicator of resales because they track contract signings.

Not much surprise here. Lets do some word math: DECLINING CONFIDENCE + SLOWING ECONOMY + JOB INSECURITY + TIGHTER LENDING STANDARDS + RISING RATES = SLOWING SALES VOLUME

More on what Lawrence Yun said via FXStreet.com:

NAR's chief economist, Lawrence Yun, said existing home sales could start to show a sustained increase within a few months. "We're looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets," Yun said. "The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met."

OK, first of all the higher loan limits only help out a subset of buyers and the GSE's are charging a 2 pt fee for access to this expanded product whose rates are high to begin with! A 2 pt fee on a loan is 2% of the loan amount; so on a loan of $600,000, you must cough up $12,000! Second, the mortgage markets are contracting and still in distress; I'll go into this in a moment. Fewer lenders are offering fewer loan products and requiring tighter standards before committing to the loan. To state that 'wider access to affordable credit should increase sales activity' is very misleading and in my opinion, just wrong altogether.

We are correcting and the process continues. The recession is most likely in its very early stages and to suggest that the recovery will come in the very near future is highly unlikely. The credit cycle is still unwinding and the sector is still re-structuring to the new world of capital preservation and deleveraging. An example of this would be Washington Mutual's exit from the wholesale mortgage business as part of the terms of the deal of their $7 billion capital raising effort.

As the lending industry corrects itself after the credit crisis disease spread so rapidly, we are starting to see fewer lenders, tighter underwriting standards, and rising rates; especially in jumbo market. This is hardly a dynamic that will assist in promoting sales activity as we go through the recession. According to Bloomberg's article, "Citigroup, Wells Fargo May Loan Less After Downgrades":

Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.

The margin may erode further in coming weeks. Credit ratings on $704 billion of bonds have been cut this year following the collapse of the U.S. housing market. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized.

The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers.

Let's at least understand the environment we are in and ask the right questions when it comes to forecasting a recovery. It amazes me that all those that kept saying the US will skirt a recession and now admit that a recession is highly likely, are already discussing the recovery! So, those in denial went from DENIAL ---> ACKNOWLEDGMENT ---> FORECASTING THE RECOVERY virtually overnight! Must be a nice frame of mind to have!

Lets get through the recession first before we can seriously discuss the recovery in housing! We are about to enter a world that is very unknown to all of us; so lets not make any predictions based on recent history where access to credit and easy money was no problem!

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