January 7, 2009 (Housing Market Monitor)

Pending Home Sales Plunge in November

January 7, 2009

By Dean Baker

Weak mortgage applications levels imply that the credit crunch is not a problem.

The National Association of Realtors’ Pending Home Sales index fell by 4.0 percent in November. This index is the most current data on the state of the housing market since it refers to contracts signed, not sales closed. This decline is consistent with the 2.9 percent fall in new homes sales reported for November. New home sales also measure contracts signed.

The decline in pending sales took place across all regions of the U.S. For the month, the sharpest decline was in the Northeast, where sales were down by 7.2 percent. The Midwest was close behind, with a 6.7 percent drop in contracts, but this followed a 4.5 percent drop in October.

The housing market in the Midwest has been especially hard hit in the last year, even though it was less affected by the bubble than the Northeast or West.  Pending sales in the region are down by 36.4 percent from their 2005 level, compared with a 33.9 percent decline for the country as a whole. Only the Northeast showed a sharper decline from bubble peaks at 41.8 percent. Clearly this falloff is attributable to the weakness of the economy in the Midwest rather than the dynamics of the bubble.

The New Home Sales index hit its lowest level in more than 50 years in November. New home sales are now down 68.3 percent from their 2005 peaks. New home sales in the Midwest are down 72.7 percent over this period.

Other news in the new home sales data was also discouraging. The inventory of unsold homes remained near a record at 11.5 months, but this figure seriously understates the size of the inventory of new homes. As noted before, many contracts are now cancelled before the sale is completed. However, once a contract is signed, the home disappears from the inventory of new homes.

As a result of cancellation rates that are reported at more than 30 percent for many builders, the supply of never-occupied homes that is available for sale is almost certainly at least 13 or 14 months worth of sales. This is consistent with the continued rise in the median period that it took homes to sell, which rose to a record 9.3 months in November.

It is also worth noting another anomaly in the data. The number of completed homes for sale in November fell by 21,000 from October, even though only 14,000 completed homes were reported as being sold. Since some homes were also completed in this month, but not sold, this implies that a substantial number of newly completed homes have been removed from the market. That suggests a concealed inventory of unsold homes that will reappear on the market when it begins to revive.

Another important point to note about the sales data, especially in collapsing bubble markets like California and Florida, is that many current sales are real estate owned (REOs) that are being bought as investment properties. In some metropolitan areas, close to half of the sales are REOs. These homes will likely also reappear on the market when it begins to revive. This will be a dampening factor on prices in these markets for many years to come.

One final point worth noting about recent data is that almost none of this downturn in sales can plausibly be explained by a credit crunch. As the result of the Fed’s policy, the interest rate on 30-year year fixed rate mortgages is hovering near 5.0 percent, the lowest level in more than half a century.

Creditworthy homebuyers are having little trouble getting mortgages as demonstrated by the relatively low reading of the applications index for purchase mortgages. This index has been near 300 in recent weeks. It has trended down with the measures of home sales.

If creditworthy homebuyers were actually having difficulty getting mortgages, then the purchase applications index should be exploding as homebuyers are forced to make multiple applications in order to secure a loan. Furthermore, many potential homebuyers would be making unsuccessful applications and not be able to purchase a home because they were not issued a mortgage.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.