Housing Market Monitor
Rise in Pending Home Sales Is Not Evidence of a Market Bottom
August 13, 2008
By Dean Baker
"Most homeowners do not recognize the extent to which their houses have lost value."The National Association of Realtors (NAR) Pending Homes Sales Index rose 5.3 percent in June from its May level. While this is good news in an otherwise very bleak market, it would be wrong to take it as evidence of a bottom in the market. By region, the largest increases were a 9.3 percent rise in sales in the South and a 4.6 percent rise in the West.
In their write-up of the data, the NAR made a point of noting sharp increases in sales in Sacramento, California, Las Vegas, Nevada and Ft. Meyers, Florida. All three of these cities had enormous run-ups in house prices earlier in the decade and have since seen their markets collapse. A high percent of current sales are undoubtedly foreclosed properties. While it is better that these properties move when placed on the market, a rise in sales of repossessed homes is not evidence of a turning market.
The other news continues to be mostly negative. The Mortgage Bankers Association (MBA) mortgage applications indexes continue to trend downward. It is difficult to make comparisons of current data with data from years prior, since the collapse of subprime lending (which is undercounted in the MBA data) will skew the MBA index upward, as does the fact that a much larger share of applications are rejected than in years prior. Nonetheless, the short-term movement in the indexes should still be meaningful and these have been consistently down over the last few months, with the purchase index about 10 percent below its spring levels.
The MBA also reports that mortgage-interest rates are rising. Today's release reports an average interest rate on 30-year fixed rate mortgages of 6.57 percent, more than a full percentage point higher than the low-points hit in the winter months. If Fannie Mae and Freddie Mac cut back their mortgage purchases, as they have said they would do, the spread between mortgage rates and treasury yields is likely to widen in the months ahead. Similarly, changes in lending practices, such as Freddie's decision to stop buying subprime debt in New York State in response to a new law holding investors potentially liable on some loans, also could reduce access to credit.
Mortgage rates will also rise insofar as higher inflation pushes interest rates higher more generally. This seems likely, with inflationary pressure mounting at earlier stages of production. The latest data on import prices show that non-fuel imports have been rising at a 7.6 percent annual rate over the last quarter, while non-agricultural export prices have been rising at an 8.4 percent rate. Some of these cost pressures will be passed on in core inflation, even though wage growth has been remarkably weak.
A recent survey by Zillow suggests that misinformation about the housing market may continue to be a serious problem. The survey found that 62 percent of homeowners thought the value of their homes had stayed the same or increased over the last year, while they estimated that 77 percent of homes nationwide had actually seen a drop in value. The failure to recognize declining home prices can cause homeowners to be overly-optimistic about their financial situation. One implication could be that they delay saving for retirement. Thus far, there is little evidence that the plunge in home values has had much impact on savings rates. When it does, the drop in consumption will be a major blow to the economy.
The failure to recognize declines in home values will also make homeowners more reluctant to sell their homes at the current market prices This is consistent with the build-up of a near record level of unsold homes. Many sellers are unwilling to drop their price to the market level. It would be better for both the homeowners themselves and the economy as a whole if people recognized what has happened to house prices over the last two years. Unfortunately, there are not many public figures anxious to advertise the fact that tens of millions of people have seen much of their wealth disappear in the housing crash.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.