Pending Home Sales in U.S. Uptick in May, Bodes Well for Second Half of 2011

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According to the National Association of Realtors (NAR), pending home sales rose strongly in May with all regions experiencing gains from a year ago, pointing to higher housing activity in the second half of the year.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 8.2 percent to 88.8 in May from an upwardly revised 82.1 in April and is 13.4 percent higher than the 78.3 reading in May 2010.  The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

This is the first time since April 2010 that contract activity was above year-ago levels, and the monthly gain was the strongest increase since last November when the index rose 10.6 percent.

Lawrence Yun, NAR chief economist, said the improvement bodes well for home prices.  "Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace," he said.  "Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle."

Pending home sales have trended up unevenly since bottoming last June, rising in seven of the past 11 months.  "Home sales still could be 15 to 20 percent higher," Yun said.  "If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we'd get a much faster recovery in the housing sector."

"In addition, a nonsensical situation has developed recently in some states with HUD unable to complete foreclosure deals because of insufficient funds to pay attorney fees at closing, even with buyers offering the full listing price," Yun added.

The PHSI in the Northeast rose 7.3 percent to 69.2 in May and is 4.4 percent above a year ago.  In the Midwest the index jumped 10.5 percent to 82.8 and is 17.2 percent higher than May 2010.  Pending home sales in the South increased 4.1 percent to an index of 95.0 in May and are 14.6 percent higher than a year ago.  In the West the index surged 12.9 percent to 100.6 and is 13.5 percent above May 2010.

Yun cautioned that healthy job creation is necessary to ensure a solid recovery in both housing and the overall economy.  "The job market has sputtered recently, and because variations in local job creation impact housing demand, markets will recover unevenly around the country," he said.

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