Big Gains in Pending Home Sales, Affordability
Increases in pending home sales suggest a possible upswing in sales activity in coming months, according to the National Association of REALTORS.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, rose 2.1 percent to 82.1 from a reading of 80.4 in January, but is 1.4 percent below February 2008, when it was 83.3.
Lawrence Yun, NAR chief economist, said the market is continuing to underperform.
“Pending home sales have a way to go for there to be a meaningful increase, but recent increases in shopping activity are hopeful indicators that we’ll see additional sales gains,” he says. “More buyers are getting into the market to take advantage of stimulus incentives and much improved housing affordability conditions, but it will take a few months before we could see this turn up in measurable sales contract activity.”
Additionally, NAR’s Housing Affordability Index rose to a new high in February.
The Regional Breakdown
The PHSI picture varied across U.S. regions, with increases everywhere except the West:
1. Northeast: rose 10.6 percent to 63.9 in February but is 11.2 percent below a year ago.
2. Midwest: jumped 14.5 percent to 83.1 and is 3.4 percent higher than February 2008.
3. South: rose 4.4 percent to 85.8 in February but is 0.1 percent below a year ago.
4. West: fell 13.5 percent to 89.6 and is 1.7 percent below February 2008.
NAR President Charles McMillan says home buyers are in an excellent position.
“The drop in mortgage interest rates and home prices mean the buying power of a typical family has never been better,” he explains. “If you have a good job and long-term plans, it’s unlikely that you’ll find a much better time to buy a home. This is especially true for first-time buyers who can qualify for an $8,000 tax credit this year, have a great selection of homes to choose from, and are in a favorable negotiating position.”
Affordability Improves
NAR’s Housing Affordability Index rose 0.9 percentage points to a record high of 173.5 in February from an upwardly revised index of 172.6 in January, and is 36.3 percentage points higher than a year ago. The HAI shows the relationship between home prices, mortgage interest rates and family income is the most favorable since tracking began in 1970.
A median-income family, earning $59,700, could afford a home costing $285,600 in February with a 20 percent down payment, assuming 25 percent of gross income is devoted to mortgage principal and interest. Affordability conditions for first-time buyers with the same income and small down payments are roughly 80 percent of that amount. The affordable price is considerably higher the median existing single-family home price in February, which was only $164,600.
“Obviously, potential home buyers need to be managing their existing debt effectively,” McMillan says. “A REALTOR can counsel you on what you may be able to afford given your personal financial situation. In some cases, buyers who want to build their future through homeownership may need to start reducing their debt and improving their credit score before entering the housing market.”
Last year at this time, the typical family could afford a home costing $265,600, which is $20,000 less than the current affordable price.
“Homes in many areas are now selling for less than replacement construction costs — clearly, this is an abnormal situation that will change once inventory is drawn down and supply and demand come closer into balance,” McMillan says.
Yun expects housing inventories to rise through early summer from a normal seasonal pattern of more sellers appearing in the spring.
“But with the positive housing stimulus incentives now in place, we expect home sales to gain momentum in the second half of the year with first-time buyers absorbing a lot of the excess inventory,” he says. “Under these conditions, we should see price stabilization in most markets by the end of the year.”
Source: NAR (04/01/2009)
