Expecting a Lift

by Lawrence Yun, NAR Chief Economist

NAR's latest pending home sales index slipped yet again. The index in March again came in soft, falling one percent from the prior month. Of course, what you'll hear in much of the media reports will be that March's index was the lowest reading since the index was created in 2001. However, smarter observers will note that for all intents and purposes, the index has actually been moving in a very narrow range from August of last year to March of this year. It's important to remember that this time period reflects post credit crunch conditions where subprime loan originations virtually disappeared from the market place.

But the pending sales index report did have some bright spots. The Northeast region continues to show some good signs of recovery. In March, pending home sales in the region rose 12.5 percent. The West and South regions were essentially unchanged. Only the Midwest region experienced a meaningful decline with a 10.4 percent fall. As with all things "real estate," some local markets fared better than others. Pending sales rose in localities where affordability conditions have measurably improved. For example, Bakersfield and Providence both showed outright year-over-year gains in March.

As for actual closings, existing-home sales finished the first quarter of this year with a 4.95 million annualized unit sales pace. That is essentially unchanged from the 5.00 million existing-home sales in the fourth quarter of last year. Home sales will continue to trend soft in the current quarter with the expectation of 5.01 million sales. In the second half of this year, look for a measurable lift to the 5.6 to 5.9 million unit range.

There are several reasons to expect the lift. Mortgages will become more widely available. Both Fannie Mae and Freddie Mac recently announced plans to further provide liquidity, including in the new higher conforming jumbo markets. California, where jumbo loans had accounted for close to half of sales in 2005, was witnessing only 10 to 15 percent of jumbo loan originations in early 2008. Any reversal in the share of the jumbo loan market will have a huge impact in markets like those in California.

Legislation is also being debated to make the higher conforming loan limit (now at $729,750 versus $417,000 a year ago) permanent rather than temporary as it is currently. The temporary status of the higher loan limit has not yet drawn investor interest in holding on to GSE backed jumbo loans, even though the spread between jumbo and regular conforming loans has narrowed.

Another key reason for a solid recovery is due to wider use of FHA loans. Many lenders are trying to get HUD approval so they can make loans. Consumers are digesting the benefits of this safer loan product that carries much lower interest rates. As consumers realize that FHA loans no longer carry the stigma as being purely for low-and-moderate income households with credit blemishes, more and more consumers will utilized the loans, thereby steadily replacing the disappearance of the subprime loans.

And let's not forget those tax rebates. Tax rebate checks are showing up in bank accounts. There are some who say the rebate is not enough to make an impact on the economy. But rebates did make a difference in 2001. And today's rebate checks are larger than the ones back then.
Other developments are pointing towards better times. Exports continue to ramp up solidly. Business profits are surprisingly solid - outside of homebuilders and the financial industry.

Business spending will grow as a result. These factors indicate that the economy will be better in the second half of this year after having stalled in the first half. The improving economy will also life consumer spirits, some gaining enough confidence to buy a home.

All that means that home prices will also improve in the second half of 2008 in many parts of the country. The return of jumbo loans and higher-priced home purchases will result in a higher recorded median home price. (Recent lower median prices were driven by fewer than normal transactions requiring jumbo loans.) As we know all real estate is local and there are large variations across markets. Even though the national median price will be lower in 2008, due to the weak first half and major price declines that already occurred in few markets, more than half of the country is likely to experience a price growth this year.

And there's a possibility of more good news. Legislation providing for a tax credit for homebuyers has been passed by both chambers of Congress, although the White House has hinted at a veto because it did not like the "big" housing stimulus bill. The White House has opposed several aspects of the stimulus bill, though it has not (yet) come out actually opposing the homebuyer tax credit concept if applied for any homes and not just foreclosed ones. The homebuyer tax credit will make market conditions much stronger than what we call for in the current baseline forecast.

Risks do still exist. Very high oil prices could stick around and that will hold back consumer spending growth. Inflation could notch higher, which then will result in higher mortgage rates. Despite these risks the economy and the housing market look to improve markedly in the second half of 2008. The momentum will carry forward into 2009.

-This article is from NAR's Real Estate Insights which can be found at www.realtor.org