Contracts to Purchase Homes Continue to Climb

Households rushed to sign more home sales contracts in October according to a leading housing organization report released Tuesday.

The index of pending home sales reported by the National Association of Realtors, climbed 3.7 percent in October compared to the previous month, marking the ninth consecutive month that the index has increased. The pending sales index is now 31.8 percent above the index registered in October 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 decline 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 large ramp up in home sales contracts this year is widely attributed to the $8,000 first-time homebuyer tax credit which was set to expire November 30. It appears some households rushed to sign a home contract in October, anticipating an expiration of the tax credit. However, Congress recently approved an extension and expansion (homeowners now qualify) of the tax credit, leading some analysts to believe that this year’s home sales momentum will be carried into next year.

NAR’s Chief Economist, Lawrence Yun places a great deal of credit for increased home sales to the homebuyer tax credit. “The tax credit is helping unleash a pent-up demand from a large pool of financially qualified renters, much more than borrowing sales from the future,” Yun said. However, other housing analysts suggest that there are a meaningful number of households who are purchasing today who would have otherwise purchased tomorrow because of the tax credit. In other words, today’s increased home sales are borrowing from next year’s home sales.

Last week, the NAR reported in another report that existing home sales in October rose by 10.1 percent from the previous month. Today’s 3.7 percent increase in the pending home sales index for October suggests that existing home sales for November are likely to have risen by about 2 to 3 percent. However, many economists point out that there is some fallout in pending contracts-the rate at which contract signings never reach the closing stage-which may result in a weaker future home sales number.

Nevertheless, the surge in pending sales contract volume in recent months indicates that buyers have come back to the home buying marketplace in a large way. They are signing a lot of contracts, even though not all of them actually close.

The favorable news in the pending home sales report bodes well for future housing 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. Home prices, on the other hand, continue to fall on a year over year basis. Last week, the NAR reported that existing home prices fell 7.1 percent in October compared with October of 2008.