Pending Home Sales Hit 5-Month High in March

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in March, increased 5.3 percent to 102.9, building on the prior month's revised rise of 8.3 percent.

"Clearly the home buyer tax credit has helped stabilize the market," said Lawrence Yun, chief economist with the NAR.

 While sales started improving in March, they are not expected to match the gains witnessed with the initial tax credit. Still, analysts do not expect the housing market to slip back into the slump that helped to tip the broader economy into its worst downturn since the 1930s.

"In the months immediately following the expiration of the tax credit, we expect measurably lower sales," said Yun. "Later in the second half of the year, and into 2011, home sales will likely become self-sustaining if the economy can add jobs at a respectable pace, and from a return of buyer demand as they see home values stabilizing."

via cnbc.com

Commentary:

In reviewing the pending transaction numbers for end of April for the past 3 years, an interesting trend develops for the St Louis housing market.  The main question that everyone - including NAR's Yun is asking now is - "how much of a slow down or moderation will we experience post April 30th?"

To accurately analyze this question the first item that must be accepted is the basic tenet or premise that real estate is local - the national overall trend may be (and likely will be) very different from the local trend.

In reviewing local housing market data and transaction numbers for three years, it would appear that the overall effect of the tax credit - the effectiveness of drawing in buyers who would not have purchased in the spring of 2010 by April 30, 2010 - was very limited.  Although we had previously thought that the local St Louis housing market had possibly seen a further increase in pendings - that could be attributed to the tax credit - we now believe after further detailed analysis that this was inaccurate and any comparision of 2009 to 2010 overstates the effect of the tax credit.

Pending Transactions - St Louis County as of first week of May:

5/2008 - 899 pendings

5/2009 - 705 pendings

5/2010 - 940 pendings

See full analysis - St Louis Housing Total Market Overview

Taking 5/2009 out of the mix for analysis allows a quick look at how few buyers - a net of just 40 additional pendings on a base of 899 as the net increase.  Many readers may not recall that beginning in the fall of 2008 with the culmination of the failing of Lehman Bros and global fears that financial markets may fail completely, the Federal Reserve and US Treasury undertook numerous aggresive steps to restore confidence and functionality of the financial markets - including the mortgage markets - including programs such as TARP which provided Billions to banks including local lenders in Saint Louis.

Despite these hurculean efforts by the Federal Goverment, the effect of a potential financial armageddon was a devestating lack of confidence in early 2009 - along with rapidly rising unemployment.  The net effect of both of these trends was a dramatic slow down in the local St Louis real estate market. 

This effectively makes comparing 2009 to 2010 for purposes of the tax credit fairly irrelevant and highly misleading.  We believe that the net effect of the tax credit was to bring in a maximum (looking at the Macro Market) of approximately 10% additional buyers (most of which would have purchased in 2010 at some point) and more real estate inventory earlier in the spring selling season. 

The only real exception to the St Louis Macro (larger or broad market) analysis where a dramatic run up in pendings can be found in the small subset of the housing market (below $175K).  In this case, the number of pendings between 2008 vs. 2010 is fairly large

Pendings         2008                2010

$100-125K         82                    128

$125-150K        101                   120

$150-$175K       87                    110

Totals:             270                   358  (+32%)

In these lower price ranges, the tax credit did in fact have a measurable, increase in the number of buyers in 2010 vs. 2008.  This effect was not felt above $300K for the 'existing' homeowner $6500 tax credit.  This tax credit had no measurable effect in these higher price points.

In mid-April, the active inventory in the market was about 10% above last years levels but remains well below the levels experienced back in spring of 2008.

Residential Housing Inventory - St Louis County:

5/2008 - 5,643 active listings

5/2009 - 4,608 active listings

5/2010 - 4,790 active listings

With inventory only slightly above the depressed 2009 levels (based on low confidence and historically unprecedented financial conditions mentioned above), it remains well below the 2008 levels.  This represents an improving overall trend in the market.  Certainly the upper price ranges - above $400K have not seen this improvement in inventory.  However, the market below $300K and especially below $200K is functioning well with well-priced homes selling in a reasonable timeframe.

In fact, based on the most recent total market overview St Louis real estate statistical analysis - the Saint Louis housing market stats are showing less than 5 months of inventory for each and very price range below $300K.  The most dramatic effects of the tax credit can be seen in the housing inventory levels as buyers absorbed or acquired homes faster than they came on the market.

Where do we go from here?

Local housing markets are at equilibrium or "balanced" with 6 months of inventory.  We expect a 'moderation' or slow down in the market - especially at the lower price points - below $175K with inventory levels returning to 6-7mos levels from the sub 5 month levels.  The higher end of the local Saint Louis housing market will continue to struggle for the foreseeable future.

Based on a normal expected seasonal growth of buyers entering the spring and summer market (with pendings growing month over month until late June/early July) , we expect the 'moderation' or 'slowdown' to be very mild in 2010 in the period immediately following the post - April 30th rush by buyers to obtain the tax credit. 

This seasonal pending trend will likely mask most of the significant moderation that was so very visible in the late fall/winter during the time period for the expiration of the previous tax credit (November 30, 2009).  In contrast, the seasonal factors during the fall were just the opposite for those present in the spring for the St Louis real estate market - with pending activity falling in the late fall/winter dramatically.  This made the 'effectiveness' of the previous tax credit readily papable and the resulting hangover - post November 30th that much more dramatic.

The bottom line is on a numbers basis, we expect - just as NAR's Yun mentions above to see moderation in sales with the overall numbers for 2010 outpacing 2009's depressed numbers.  The good news is most observers will most likely barely notice this slow down due to seasonal factors which continue into the mid-summer months.