Pending Home Sales Surge, Now What?

For the seventh consecutive month, pending sales of existing homes rose sharply in August reaching it’s highest level since March 2007.

The National Association of Realtors Pending Home Sales Index, based on signed contracts was up 6.4% to 103.8, which makes it the longest consecutive month to month increase since the index began tracking in 2001. The index rose from 97.6 in July and is currently 12.4% above August 2008’s level of 104.5.

Most economists were anticipating pending home sales to rise, but by only 1%. So is this the turn around we’ve all been waiting for? Not quiet. Although these numbers seem to indicate we are moving in the right direction of a housing recovery, it is important to understand what is driving this increase in the first place.

These numbers reflect “Pending Home Sales”. In the past, when a buyer and seller entered into an agreement for the sale of real estate, the transaction lasted an average of 35 days. This is no longer the case in today’s market.
With Bank Owned properties or REOs which are averaging about 45 days and Short Sales which can easily take about 3-6 months, Pending home sales can be very deceiving in the sense that many of these pending homes will also be pending a few moths from now or may fall out of escrow due to complications brought on by inspections or new appraisal rules.

Another important part to consider is the flood of First Time Homebuyers currentlyon the market. According to the National Association of Realtors, more than 50% of all homes sold in July were by First Time Homebuyers.

This surge in activity can be attributed in part to the decline in home values but mainly due to the Government stimulus in the form of the First Time Homebuyer Tax Credit. The tax credit was designed to boost home sales in a sharply declining real estate market. First Time Homebuyers would be entitled to 10% of the homes purchase price up to $8,000.

With the First Time Homebuyer Tax Credit drawing to an end on November 30th, buyers hoping to take advantage only have until October 15th to have their offers accepted in order to have a chance at closing escrow before expiration.

What does this mean to the Real Estate Market?

What will happen to all the buyers who based their decision of buying a home on the incentive of Tax Credits? That is the single most important question in determining the direction in which the housing market is headed.
Should they decide to end their search and stay put,this will create a mini housing bubble which will burst causing home values most likely to decline retesting the lows of a year ago.

There is a strong push by the National Association of Realtors which I endorse as well, to extend the First Time Homebuyer tax Credit. In doing so, Housing values will continue to increase as Foreclosure Rates begin to decline. As of today there are 12 bills relating to an extension of the Tax Credit.