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After Two Strong Months Pending Home Sales Fall 1.3% in July

After posting two strong consecutive months, pending home sales fell in July according to information released Monday by the National Association of Realtors® (NAR).  The Pending Home Sales Index (PHDI), a forward-looking indicator of housing market health, registered 89.7 in July, down 1.3 percent from the 90.9 reported in June.  The July decline was small but disappointing as it follows a 2.4 percent increase in June and an 8.2 percent jump in May. Despite the weak July results the Index remains 14.4 percent higher than it was one year earlier when the NAR reported it at 78.4.

The PSHI is based on sales of existing homes where a contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.  An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.

Lawrence Yun, NAR chief economist, said sales activity is underperforming. “The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”

All regions show decreases except for the West, which continues to show the highest level of sales contract activity.  In that region the index was 110.8, 3.6 percent above June and 20.6 percent higher than last year.  Pending sales in the Northeast declined to 67.5 percent, down 2.0 from June but 9.7 percent higher than one year earlier.  Midwest figures were down 0.8 percent to 79.1, 18.8 percent higher than July 2010 and in the South the index was 94.4, a drop of 4.8 percent from June but 9.5 percent above the comparable 2010 figure.

“Looking at pending home sales over a longer span, contract activity over the past three months is fairly comparable to the first three months of the year, and well above the low seen in April,” Yun said. “The underlying factors for improving sales are developing, such as rising rents, record high affordability conditions and investors buying real estate as a future inflation hedge. It is now a question of lending standards and consumers having the necessary confidence to enter the market.”

The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.

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