Are Home Sales Headed for a Late Fall Slide?

Pending home sales increased 6 percent in September, the National Association of Realtors said.

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A gauge of home-purchasing activity came in stronger than expected in September as buyers moved to take advantage of falling home prices, attractive mortgage rates, and a tax perk from Uncle Sam. The National Association of Realtors said Monday that its pending home sales index for September increased 6 percent from August and was more than 21 percent higher than in September of 2008—the largest year-over-year jump on record. (Pending home sales are measured by contract signings, as opposed to closings.) The index has now posted eight monthly increases in a row, representing the longest winning streak in its eight-year history. "Contract signings haven't been running this hot in almost three years," analyst Mike Larson of Weiss Research said in a report. Here are three things you need to know about the development:

1. Low prices, attractive mortgage rates: Home sales have firmed up in recent months as falling property values and cheap mortgage rates have increased the affordability of the housing stock. Through August, home prices in 20 major U.S. cities had returned to autumn 2003 levels, down more than 29 percent from their 2006 peaks, according to the most recent S&P/Case-Shiller report. Rates on 30-year fixed mortgages, meanwhile, dropped to an average of 5.18 percent in the last week of September, down from 6.22 percent a year earlier, according to HSH.com.

[See What a Median-Priced Home Looks Like Throughout the Country.]

2. $8,000 deadline: At least a portion of the report's strength reflects the looming expiration of the $8,000 first-time home buyer tax credit. In order to obtain the popular tax perk, buyers must have a transaction closed by November 30. And since closings can take 30 to 90 days in today's market, buyers need a signed contract well before the tax credit's deadline to ensure they'll qualify. "Clearly, buyers were eager to get business done before the credit's November expiration," Larson said. Last week, however, Senate lawmakers reached a bipartisan deal to push back the tax credit's deadline and expand it to current homeowners. In addition, the Obama administration expressed support for extending the credit, making the likelihood of its enactment. The political outlook for expanding the first-time home buyer tax credit was less clear in September, prompting some buyers to believe they needed to act fast or risk missing out.

[See First-Time Home Buyer Tax Credit Gets Obama Nod.]

3. October surprise: October, however, is much closer to the November 30 deadline. And, again, for most of October the outlook for the credit's extension was less optimistic than it is today. As a result, some housing experts say pending homes sales figures may slip when the October numbers come in. "We are still cautious," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report. "[I]t may be simply that people rushed to contract in Sep so as to be sure of closing by Nov 30, in which case there is still scope for a sharp fall in the October index."

For his part, Larson says he wouldn't be shocked to see the pending home sales index decline in the next couple of months, but he doesn't feel any slippage will be enough to derail a recovery. "[W]ith Congress set to extend the credit through mid-2010 . . . and expand it to a broader pool of potential buyers . . . the market should remain fairly well-supported," he said in a report.