The number of Americans signing home sales contracts flattened out in December after plunging the previous month. The National Association of Realtors' pending home sales index—which gages signed contracts but not transaction closings—inched up 1 percent from November to December and stands at nearly 11 percent above its year-earlier level. December's reading, which was released Tuesday, follows a month-over-month drop of roughly 16 percent in November. "You have hit some sort of floor level of demand in housing," says Mike Larson of Weiss Research.
1. Hangover: November's sharp monthly decline in pending home sales was linked to the first-time home buyers tax credit. Buyers needed sales contracts signed by at least the end of October in order to ensure that their transaction would close by the tax credit's original deadline of November 30. This worked to increase the pending homes sales index in October and at the expense of November. Real estate experts were encouraged that the pending home sales index held its ground in December after November's drop. The report "suggests that the hangover effect from the first-time home buyer tax credit is likely to be relatively limited and that sales will continue to recover throughout the spring," says Nomura Securities economist Zach Pandl.
2. Fundamentals: December's pending home sales stability was driven by several key factors. First, home prices have dropped precipitously since the housing bubble popped. Real estate values in 20 major U.S. cities, for example, are down roughly 29 percent from their 2006 peaks, according to the most recent Case Shiller report. More affordable home prices, of course, work to bring more buyers into the market. Meanwhile, 30-year fixed mortgage rates—which fell below 5 percent for the week ending Jan. 28—are sitting near all-time lows. "The big picture story on housing—outside of how the tax credit can influence the monthly numbers—is that houses are cheap again," Larson says. "You are still seeing cheap homes and cheap mortgages combining to make housing affordable." If that's not enough, the first-time home buyer tax credit was extended and expanded in early November to include even current homeowners who sign a sales contract by April 30th and close the transaction by the end of June.
3. Improving sales: These factors should work to increase real estate sales as we move into the spring home-buying season, says Michelle Meyer, an economist at Barclays Capital. "We should prepare of another sharp gain in home sales, in particular through April for signed contracts given that that's when the tax credit goes until," Meyer says. She expects pending home sales to fall back after April just as they did in the wake of the original tax credit deadline.
4. Rebound: While arguing that pending home sales won't drift much lower than current levels, Larson says anyone expecting an aggressive real estate rebound is in for a disappointment. "We have probably seen the depths of this indicator in this cycle," he says. "But at the same time, do I think that we are going to see some huge rebound? No I don't." That's because despite the increased affordability, the real estate market still faces stiff headwinds. A national unemployment rate of 10 percent will continue to limit demand. Tighter credit standards will keep many would-be buyers on the sidelines. And the foreclosure pipeline is poised to toss additional units onto an already-bloated inventory and put downward pressure on home prices. While Meyer believes that home prices at the national level are "bouncing along the bottom," she doesn't expect a sustainable upturn in prices anytime soon. "I don't see much upside to home prices and that's largely because there is still a very large foreclosure pipeline that will remain with the housing market for some time," Meyer said.