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Are “Pending Home Sales” Real?

Published: Wednesday, 3 Jun 2009 | 12:00 PM ET
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By: Diana Olick
CNBC Real Estate Reporter

AP

The latest report from the National Association of Realtors shows that the number of contracts signed on homes in April rose 6.7 percent from the previous month.

That’s what they call a “pending home sale.”

Of course that buyer still needs to do the home inspection and, most important, get the financing before closing.

(Video: CNBC's Diana Olick discusses the April pending home sales jump.)

Once the contract is “closed” that statistic goes into the “existing home sales” bin.

Historically, the pending home sales index has tracked along pretty closely with the existing home sales number, and so has been a pretty reliable leading indicators. Lately that’s become less and less true.

Take a look at this chart from the Field Check Group and PaperEconomy.com:

Source: Field Check Group

Right around the third quarter of last year, the pending series got a little funky. Part of that is the increasing volume of short sales (where the bank agrees to let the house be sold for less than the value of the mortgage on it). Banks have been slow to approve these contracts and more likely not to approve them, so that muddies the numbers. A new government incentive to get short sales moving may help in the coming months, but so far it’s not.

Another issue is appraisals. I realize I’ve already discussed this, so I won’t get heavy into it, but many appraisals are now coming in lower than the contract price. Today’s already-iffy buyers aren’t willing to hang in there when they find out the house is worth less.

I’m wondering now though about this recent spike in mortgage rates. Believe it or not, a lot of buyers don’t lock into rates because it’s a bit more expensive. Many “unlocked” loans that are pending will obviously not be able to close, given the much higher monthly payments. I realize this is anecdotal, but I just saw a house go back on the market in my neighborhood over the weekend. The ad read: “Financing Fell Through.”

Questions?  Comments? 

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