Thursday, December 2, 2010

Pending Home Sales – A Closer Look

Source data:
The current index reading for October 2010 is 89.3.  A 100 reading indicates the level of contract activity as of 2001.  The contract activity is a count of pending contracts, not an estimated sum of overall contract value.  The reading is down from 112.4 in October 2009, and up from 80.9 last month. 
Their staff economist, Lawrence Yun, attributed much of this to looser lending standards and more affordable prices.  The issue I have with this interpretation is:
1.       The lending standards affect the actual sale of the home, rather than the pending sale.  For example, if I enter into a pending contract to buy a home, I still have to then get approval on the financing of that purchase.  Also, a much larger percentage of buyers recently have been all-cash auction purchases, which would not accurately capture the lending environment.  The Federal Reserve Bank of St. Louis has better research on this topic that more specifically addresses real estate lending:

Click on “view data” to get a more granular view, but this shows the actual total real estate loan activity (both existing and new loans) of all commercial banks.

Another group of metrics I really like, these metrics show where the loan officers at banks are actually doing in the mortgage market.  For instance:

This shows that loan officers are actually tightening standards for prime loans.
This shows that loan officers are all but shutting down subprime loans.

In a separate but interesting tangent:
They’re now more than willing to let you ramp up your credit cards.  Go figure.  They love your unsecured debt, but hate your asset secured debt.  Such is the securitized debt markets and funky accounting, where they’re trying to make MBS prettier, while stuffing garbage in consumer debt.   

2.       Median prices are currently at $170.5K vs. $172K October of last year, yet, sales are down 20%.  The price of the home strikes me as being an almost irrelevant correlation here.  Ultimately, most economists view home prices as being stable at 3x median household income.  The current average in the US is $49,777, so the stable median price should currently be about $150K.  As such, current home values are about 13.7% overpriced compared to stable market demand.   

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