The question that has been on the lips of real estate investors and homeowners alike is “Has the real estate market hit bottom?” It can rightly be said that we have made steps in the right direction with the release of the Pending Home Sales Index report on August 29, 2012. I was very excited when I saw the numbers and could not wait to write about it. Read on to see why it matters to real estate investors.
The Pending Home Sales Index – What is it?
The Pending Home Sales Index was developed by the National Association of Realtors and is the leading indicator of housing activity and. Its purpose is to indicate existing home sales but not new home sales. If for example, if a contract is signed for the sale of a home but it is not yet closed, it is rated as pending. Under normal circumstances, it takes between four and six weeks to close such sale.
There is a relationship between housing and the general state of every given economy. It serves as an indicator for economic turning points.
“A sharp drop in housing demand typically acts as a warning signal of economic slowdown. Buyers are reluctant to purchase houses when interest rates are high, disposable income is low, or consumer confidence is low. Conversely, a rebound in the housing market is often a leading indicator of an economic recovery.”
What happened to the Pending Home Sales Index in July?
The latest good news out of the housing sector is a 2.4 percent rise in the pending home sales index, a gain that points to further improvement for existing home sales. The year-on-year rate of plus 12.4 percent is the highest in nearly 2-1/2 years. Regional data show gains in 3 of 4 regions led by the South which is the largest region. Sales of existing homes have been trending higher for the last year though gains have been slightly lagging those for new homes.
Released On 8/29/2012 10:00:00 AM For Jul, 2012
According to the statement released by the National Association of Realtors, “Pending home sales rose in July to the highest level in over two years and remain well above year-ago levels. The index is at the highest level since April 2010”, says the chief economist of the National Association of Realtors, Lawrence Yun. He also said…
“While the month-to-month movement has been uneven, we now have 15 consecutive months of gains in contract activity. All regions saw monthly increases in home-buying activity except for the West, which is now experiencing an acute inventory shortage.”
With the existing home sales projected to increase by 8 or 9 percent in 2012 and 7 to 8 percent in 2013, it becomes an indicator that there will be up to 10 percent increase in home prices over the next two years.
Why do Investors Care?
The Pending Home Sales Index is an accurate gauge of both the demand for housing and the economic momentum. How is this? Simply put, “this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments.”
With the economic backdrop being the major influencing factor on financial markets, the output on home re-sales is directly linked to stocks, bonds and commodities. This means that the trends recorded in current home sales data should serve as indicators to mortgage lenders, home builders and home furnishing companies.
Yun, of the National Association of Realtors, goes further to state that…
“Falling visible and shadow inventories point toward continuing price gains. Expected gains in housing starts of 25 to 30 percent this year, and nearly 50 percent in 2013, are insufficient to meet the growing housing demand.”
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Graphic, excerpts and quotes from the following sources: