Deterioration in Pending Home Sales Confirms Broader Trend, Economists Say

Economists say the March report for pending home sales confirms what has been known for many months now: the U.S. housing market is still several months away from stabilizing.

U.S. pending home sales fell in line with expectations on Wednesday morning, declining 1.0% month-over-month to confirm the consensus forecast in March, according to the National Association of Realtors (NAR). However, February's 1.9% decline was downwardly revised to a deeper 2.8% decrease.

The PHSI now stands at 83.0, a new all-time low, down from a revised 83.8 in the previous month and indicating a 21.7% decline from March 2007.

Benjamin Reitzes, economist at BMO Capital Markets, said the report essentially gives no new data, just a confirmation of the longer-term trend. He explained that the U.S. housing market will take several more months until it recovers, and that sales cannot be expected to improve until prices stabilize.

Leading the declines were pending home sales in the Midwest, which pulled back 10.4%, the West, which declined 1.4%, and the South, which fell 0.1%. The North Eastern region was the only area to report a gain, picking up a significant 12.5% from the previous month.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the downward trend in the housing market has "reasserted itself" after the brief rebound in September and October.

"With house prices plummeting, the incentive to buy a home is now non-existent, so sales will keep falling until builders cut production far enough to bring inventory down," he added.

NAR chief economist Lawrence Yun said the extent of an expected recovery hinges on better access to affordable loans.

"Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas," he said. "As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half. Some time is needed for FHA and new conforming jumbo loans to become widely available."

The median price of existing homes is set to fall 2.4% in 2008 before rising by 4.1% in 2009, according to forecasts in the report from the NAR, who also said they expect existing home sales in 2008 to come in at 5.39 million, followed by a pace of 5.72 million in 2009.

"Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure," Yun said. "We're looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets. The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met."

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 March report released April 22, existing home sales fell 2.0% to a seasonally adjusted annual rate of 4.93 million units.

By Patrick McGee and edited by Nancy Girgis