Pending Home Sales Fail to Indicate Housing Bottom

U.S. pending home sales surprised to the downside on Tuesday morning, declining 1.9% month-over-month despite calls for a 1.0% pullback in February, and failing to give any indications of a timeframe for a bottoming out in the housing market.

"The idea that U.S. home sales are in the process of stabilizing has been dealt a blow by the latest U.S. pending home sales report," said Dimitry Fleming if ING Wholesale Banking. "Weak sales data mean there remains limited scope for the supply overhang to be redressed soon, which means continued downward pressure on home prices is warranted throughout 2008."

While economists were not expecting an immediate rebound in the ailing U.S. housing market, Ian Shepherdson, chief U.S. economist at High Frequency Economics, was more optimistic about the report, saying the decline was not large enough to signal a new, "lurch in the downward trend of the housing sector."

"Allowing for the volatility of the numbers and the scope for future revision, the trend has been more or less flat for the past six months," he added.

Indeed, January's flat reading was revised to a gain of 0.3%.

Significant drops were seen in the Midwest, which pulled back 3.7%, the South, which declined 5.5%, and the East, which fell 9.8%. The North Eastern region was the only area to report a gain, picking up 3.2% from the previous month.

TJ Marta of RBC Capital Markets argued that a rebound in the U.S. housing sector will be impossible until excess supply of homes in the market clears. He said that when pending home sales rebound, "it will be because sellers are capitulating on price, which will cause the realization of net worth destruction."

"The consumer is becoming conscious of this threat, as indicated by the lagging collapse of the perception about their personal finances," he added.

Pending home sales are an important tool used in forecasting existing home sales, which are scheduled for release on April 22.

"At this level, pending sales are consistent with broadly stable existing home sales, at about 5M per month," added Shepherdson. "We still think the next move in the index will be a further decline, as it becomes clear that the accelerating drop in prices means bargain-hunting is seriously premature."

By Erik Kevin Franco and edited by Stephen Huebl