Increase in U.S. Pending Home Sales Related to Foreclosures, Economist Says

After declining in five of the past six months, U.S. pending home sales unexpectedly jumped 6.3% in April to reach a level of 88.2, the highest level in six months, according to the National Association of Realtors. Economists say the rising pace of foreclosures may have helped the index.

The consensus was expecting the pending home sales index (PHSI) to fall by 0.5% in the month, with forecasts ranging from a decline as low as 1.5% to an improvement of up to 1.0%.

Brian Bethune, chief U.S. financial economist at Global Insight, said it's hard to read into what the increase means, but with the number of foreclosures that have gone up, it's possible that the increase reflects purchases of foreclosed homes.

Bethune said the sales could also be related to what he called "pre-foreclosure sales", meaning that when people can't keep up with payments, they attempt to sell their house and prevent it being foreclosed.

He said the positive spin to the report is there are more sales, but the negative side is the overhang of supply, which was 11.2 months at the current sales pace in the last existing home sales report.

The PHSI now stands at 88.2, up from 83.0 in the previous month, which was an all-time low. From a year prior, the index has declined by 13.8%, compared to the previous month's 21.7% annual decline.

Sales in the Midwest advanced 9.6%, the South increased 3.9% and the West gained 7.6%. The Northeastern region was the only area to decline, falling by 1.5% from the previous month.

NAR chief economist Lawrence Yun said areas that have seen sharp price declines are now seeing a sales recovery.

"Bargain hunters have entered the market en masse, especially in areas that have seen double-digit price declines," he said. However, Yun noted the immediate outlook is "unclear" because of strict lending rules and the current level of consumer pessimism.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, called the release "startling, to say the least", but he said seasonal issues may be responsible for the reported increase.

"The exceptionally early Easter meant that all the holiday disruption was in March, so April had more selling days than usual. You should expect a sharp drop in the May numbers, but at the same time the May existing home sales numbers should enjoy a temporary boost, given the lag between contract signings, captured by pending sales, and closings. Overall, though, there is no reason to expect a genuine recovery in activity any time soon," he said.

The PHSI looks at home sales that have been signed but not finalized, a process that takes another month or two. The value of the index lies in its ability to forecast existing home sales, which represent eight-tenths of the market. In the April existing homes report released on May 23, existing home sales fell to a seasonally adjusted annual rate of 4.89 million units.

The next existing homes sales report will be released June 26.

By Patrick McGee and edited by Nancy Girgis