Pending Home Sales Drop

MBA (7/9/2008 ) Velz, Orawin
The number of potential homebuyers signing contracts to buy previously owned homes fell in May. The National Association of Realtors Pending Home Sales Index fell by 4.7 percent to 84.7, partially reversing the 7.1 percent jump in April. The index was down by 14.0 percent from last May.

Pending home sales dropped in every region of the country: 7.1 percent in the South; 6.0 percent in the Midwest; 2.9 percent in the Northeast; and 1.3 percent in the West. Compared with a year ago, the West was the only region that saw an increase. The second consecutive year-over-year increase in the region was encouraging, although it was likely aided by the region’s rapidly rising foreclosures and sharp declines in home prices.

The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closings, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Following the huge increase in the pending home sales index in April, existing home sales rose 2.0 percent in May. The decline in May pending home sales suggests that existing home sales should drop off in the near term.

Other leading indicators of home sales showed little signs of improvement in the housing market in the coming months. The Mortgage Bankers Association’s weekly survey of mortgage applications showed that purchase applications dropped in May and June as mortgage rates trended up. In addition, the National Association of Home Builders/Wells Fargo Housing Market Index, a measure of home builders’ confidence, continued to hover near a record low in May and edged down further in June, matching the record low reached in December 2007.

Speaking at a Federal Deposit Insurance Corp. conference on mortgage lending yesterday, Federal Reserve Chairman Ben Bernanke said that the Fed is considering extending its emergency lending facility program to major investment banks into 2009. The program, put in place during the Bear Stearns liquidity crisis, was originally set to run through mid-September.

Bernanke’s comments supported the view that the Fed may leave the federal funds rate unchanged for an extended period as the Fed is unlikely to hike rates while keeping open its emergency lending facilities. Bernanke also suggested that Congress should consider expanding the Fed’s mandate to include financial stability. To accomplish that, the Fed would need the explicit authority to directly examine investment banks and other regulated financial institutions, including the power to set standards for capital liquidity holdings and risk management for investment banks.

Long-term yields were little changed. The yield on 10-year Treasuries hovered around 3.90 percent by mid-Tuesday afternoon.