How excited should we be that that the National Association of Realtors' "pending home sales index" for existing homes jumped 6.7 percent, month-over-month, in April -- the largest monthly rise in almost eight years?
Sure, stock prices surged instantly on the news (although they later subsided) and some analysts were exuberant.
"It's a very positive and encouraging number. It plays into the 'green shoots,' economy stabilization story," said William Hornbarger, senior fixed income strategist at Wachovia Securities in St. Louis.
"This is yet another positive indication that the bottoming process is forming," Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients. "Now if only prices would stabilize."
Pending home sales are a measurement of contracts signed to buy houses, so the index is a forward-looking indicator that tells what could be happening in the existing home sales market in May and June. Even though the sampling size for pending homes sales is about half of that used for closing sales data, historically there has been a pretty close correlation between the two indicators. Thus the exuberance.
However, as the essential (when interpreting new housing data) Calculated Risk notes, NAR's chief economist Lawrence Yun, normally an unrepentant booster, cast an unexpected note of caution on the news in NAR's press release.
Yun cautions that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. "In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons," he said. "Mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment."
A "short sale" is a sale where the price of the home is less than the balance owned on the existing mortgage on the property. A commenter at Calculated Risk points us to the Seattle Bubble blog, where an incredible level of granular detail on local home sales can be obtained, and where the issue of pending sales versus closing sales has been a hot topic in recent months. (Reason 7,347,423 why the Internet is way cool.)
In the first quarter of 2009, Seattle Bubble informs us, only one in three pending sales in the Seattle area closed in 30 days.
A rise in pending sales is better than a decline, no doubt, but there are also other reasons to be skeptical. Mortgage interest rates are beginning to rise again, job losses are still continuing apace, pushing more and more homeowners into delinquency on their loans, and foreclosures are at a record pace. It's not yet time to call the bottom.