The National Association of Realtors developed the pending home sales index to be used as a leading indicator of housing sales. It is specific to existing home sales and does not represent new home sales. The Pending Home Sales Index jumped 4.3% in August, having previously jumped 4.5% in July. A quick take on this would be that housing is coming back from the bottom it made due to the end of the stimulus payout. But, wait a minute! Is this really the good news that it seems?
Think about it a minute. Pendings include all of those wonderful short-sales which we all love so much. The Pending Home Sales Index movement could be due to a simple increase in the time that it takes to close a short sale. This would give the appearance of an increase in pendings caused by more contracts being written. Let's take a quick look at another metric.
The Case Shiller index, widely relied on by media and investors, shows that we've had a 31% drop in prices from February 2005 until August, 2010. However, if you look at the total value of all home sales and not just the price, you get another picture. Take the inflation adjusted sales price and multiply it by the actual sales volume (not pendings, but sales) and you see that there has been an 84% drop in the housing sector's total value. This isn't cause for celebration.
This finding is reinforced by the interesting observation that the Lennar division which generates the most profit is primarily engaged in buying and selling bad mortgages and REOs, not building houses. It seems as if building new houses is not what we need at this time. The need to find economical ways to handle the huge inventory of distressed homes is the critical requirement.
We must find ways to increase investment in distressed houses. The people who can most help here are the small investors who have been mostly sidelined by the insecurity in the financial marketplaces at this time.
Now we potentially have a huge issue with the marketability of titles based on the recent foreclosure related problems of GMAC, JPM, and other large financial institutions. This might slow the market even more. After all, who wants to purchase a home with a dubious title, investment or otherwise? Is there a way around this problem? Time will tell.
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