Households Signed More Home Sales Contracts in August

Households rushed to sign more home sales contracts in August that at any other month this year according to a leading housing organization report released Thursday.

The index of pending home sales reported by the National Association of Realtors, climbed 6.4 percent in August compared to the previous month. The surge in sales contracts on existing homes in August was the highest monthly pace of contracts this year; and also was the seventh consecutive monthly gain in the index.

The pending sales index is now 12.4 percent above the index registered in August 2008. The large jump in the index exceeded economists’ expectations as represented by a panel of analysts surveyed by Briefing.com that had a forecast of a 1 percent rise in the index.

Pending home sales are contract signings, not closings, and thus considered a leading indicator of existing home sales which are closings. The ramp up in home sales contracts over the past several months can be partially attributed to the $8,000 first-time homebuyer tax credit which is set to expire November 30.

NAR’s Chief Economist, Lawrence Yun said, “No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month.”

Last week, the NAR reported in another report that existing home sales in August fell 2.7 percent from the previous month which brings into question the accuracy of the pending home sales index as a reliable indicator of future home sales. Many economists agree that the fallout rate-the rate at which contract signings never reach the closing stage-has increased markedly in recent months and probably explains the discrepancy between contracts and closings. Some of the households that sign a sales contract may not be able to obtain a mortgage to close the deal due to stricter credit underwriting standards. The NAR also cites that there continues to be problems in the new appraisal rules which are making it difficult for some deals to satisfy the loan-to-value ratios required by underwriters.

Nevertheless, the surge in pending sales contract volume in recent months indicates that buyers are coming back to the home buying marketplace. They are signing contracts, but not all of them actually close.

The favorable news in the pending home sales report bodes well for future existing home sales activity. Combined with other recent favorable housing reports over the past several months, strengthens the notion that the housing sector is firmly on a recovery trajectory, at least from a sales perspective.