Contracts to Purchase Homes Plummet

Written by: David Lereah   Tue, January 5, 2010 Beyond Today's News, Market Activity

There was a large drop-off in the number of households signing home sales contracts in November compared to the number of signed home sales contracts posted in October, according to a leading housing organization report released Tuesday.

The index of pending home sales reported by the National Association of Realtors, plunged 16 percent in November compared to the previous month, marking the greatest monthly decline on record. The pending sales index registered a 96.0 in November compared to a 114.3 index in October. This was the first monthly drop in the index, after nine consecutive monthly increases. The large monthly drop in the index exceeded economists’ expectations as represented by a panel of analysts surveyed by that had a forecast of a 2 percent decline in the index. On a year-over-year basis, the index is 15.5 percent above the index registered in November 2008.

Pending home sales are contract signings, not closings, and thus considered a leading indicator of existing home sales which are closings. The large fall in contract signings is partially explained by household behavior surrounding the $8,000 first-time homebuyer tax credit which was scheduled to expire at the end of November. Many households rushed to purchase homes in September and October in anticipation of the expiring tax credit. But with Congress extending and expanding the tax credit through June of this year, many households felt less urgent to sign deals in November.

The extended tax credit is expected to boost home sales again in the coming months. According to NAR’s Chief Economist, Lawrence Yun, “it will be at least early spring before we see notable gains in sales activity as homebuyers respond to the recently extended and expanded tax credit.”

The tax credit combined with an improving economy and increased housing affordability create a favorable backdrop for housing activity during the first half of this year. Most housing analysts expect a revival in home sales during the first quarter.

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