Pending Home Sales Pop

Spurred by a desire of home buyers to get in under the wire of the $8,000 “first time” homebuyer tax credit that expires at the end of November, the National Association of Realtors' pending sales index jumped 6.4% to a reading of 103.8 from 97.6 in July. This was the highest reading since March of 2007.

Another factor in the increase is the rise in the number of short sales (people selling the house for less than the amount of the mortgage, with the OK of the bank holding the mortgage) which involve a lot more paperwork and thus a longer time between the agreement to buy and the actual closing. Still, this is some more evidence that we have turned the corner in the housing market.

That turn has been helped along by an extraordinary amount of government assistance. Not just the tax credit, which is not particularly well targeted and ends up giving a lot of money to people who would have probably bought a house anyway (but perhaps not this month), but also the Fed buying up just about every scrap of mortgage paper being issued. This has helped to hole mortgage rates way down, and thus stimulate housing sales.

The FHA has stepped into the shoes of the crazy mortgage brokers who were doing those "zero-down" mortgages a few years ago, by offering mortgages with only a 3.5% downpayment, and allowing the tax credit to be used as the downpayment. In areas where home prices are falling (until very recently that was most of the country) it means that the homeowner will almost instantly be underwater.

Underwater homeowners are at extremely high risk of default. Look for a massive bailout of the FHA within the next two years. My guess is that is will be measured in the hundreds of billions, but hey -- been there, done that.

Gains were widespread regionally, on both a month-over-month and year-over-year basis. The biggest gain was seen in the West, where pending sales jumped 16.0% for the month and are up 22.3% year over year. The next strongest region was the Northeast, which saw an 8.2% increase over July and is up 12.0% year over year. The Midwest enjoyed a more modest 3.1% rise on the month and is up 8.2% year over year.

The extremely important South region was the laggard, with a rise of just 0.8% for the month. Pending sales in Dixie are 8.2% higher than a year ago.

There is not an exact correspondence between pending sales and the existing home sales for the following month, in part because the pending sales index is based on a much smaller sample, and sometimes a deal falls through. Deals falling apart have become more common over the last few years than they used to be.

Still, this is an indication that existing home sales will probably be fairly robust in September and October. The big question is what happens when the tax credit expires and the Fed just stops buying all that mortgage-backed paper (let alone when it tries to reverse course and sell it).

In the meantime, the higher level of existing home sales will help to clear out some of the inventory and stabilize the market. That in turn should prevent housing prices from falling much further, and keep at least a few homeowners above the rising flood.

Existing home sales do not do nearly as much for economic growth as new home sales, but then again they do not add to the overall supply, either. The economic effects are more indirect. When they rise, they result in higher commissions for realtors, and more revenues for title insurance companies like First American (FAF - Snapshot Report) and Fidelity National Financial (FNF - Snapshot Report). People also tend to redecorate and paint when they move to a new place. This helps firms like Sherwin Williams (SHW - Snapshot Report) and Ethan Allen (ETH - Snapshot Report).

All things considered, the increase in pending home sales is a good thing, but I am not sure it will last. So we should enjoy it while it is here.