October pending home sales rise, but construction spending goes flat

Just call it a mixed start to December, from a macroeconomic standpoint. First, the upside: Pending homes sales rose 3.7% in October -- the index's ninth straight monthly increase, the National Association of Realtors announced on Tuesday. However, construction spending was flat in the month, according to a report by the U.S. Commerce Department, also released on Tuesday, as an increase in residential housing spending was offset by a decline in public works.

A Bloomberg News economists survey had expected construction spending to fall 0.4% in October. This measure also fell a revised 1.6% in September, which was worse than the previously announced 0.8% decline. Construction spending has declined for about a half-year.

The NAR's Pending Home Sales Index, a forward-looking indicator, increased to 114.1 in October from 110.1 in September. It stood at 103.8 in August. The index is based on sales contracts signed for existing homes, in this case contracts signed in October. Most homes sales close within six weeks of a signing, and at that point the government counts them as existing home sales.

In general, economists view existing home sales as a more-accurate indicator of the housing sector than pending home sales, due to the number of pending sales that fall through because of mortgage problems, title issues, liens and other complications that sometimes prevent signed contracts from closing.

Not Borrowing Sales from the Future?

Even so, NAR Chief Economist Lawrence Yun made the case that the pending home sales trend indicates positive momentum is underway in residential real estate.

"Keep in mind that housing had been underperforming over most of the past year. Based on the demographics of our growing population, existing-home sales should be in the range of 5.5 million to 6.0 million annually, but we were well below the 5 million mark before the homebuyer tax credit stimulus," Yun said in a statement. "This means the tax credit is helping unleash a pent-up demand from a large pool of financially qualified renters, much more than borrowing sales from the future."

However, the construction spending data will likely raise concern on Wall Street. It was flat in October -- totaling a seasonally adjusted annual rate of $910.8 billion, statistically equivalent to the $910.4 billion rate for September -- and hence doesn't change the downward spending trend. In October, private construction increased 0.3%, but public construction fell 0.4%. Also, the revision in September's spending drop to a decline of 1.6% from 0.8% will likely broaden concerns in institutional investor circles that softness persists in U.S. construction -- a trend that must reverse for the U.S. expansion to strengthen.

One bright spot in the October data: Private home construction increased 4.4% over September.

During the first 10 months of 2009, construction spending has declined 12.6%. Year-over-year, it's down 14.4%.

Economic Analysis

Of the two data points, the market will put more weight on the pleasant pending home sales data, but Wall Street will also keep an eye on construction spending. True, the October stat was skewed lower by the decline in public construction, but the bigger picture is that construction spending remains in a downtrend, and it's hard to envision a sustained U.S. economic recovery without a sustained increase.

Finally, the October pending home sales data are positive for the economy, but not as telling as the final new home sales and existing home sales. Even so, the now-nine-month rise in pending homes sales does provide evidence of a sustained increase in homebuyer interest over the past year.

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