Does a Drop in Home Sales Portend a Double-Dip?

The housing market broke its lucky streak with a depressing report from the National Association of Realtors.

The number of people with signed contracts to buy a home was down 16 percent in November compared to October. Sixteen percent! Suddenly the media - ABC News, the New York Times, etc. - is talking about a "double-dip" downturn for housing with falling prices again this winter.

Is this the beginning of another horrible winter for housing?

A little perspective always helps. The pending home sales index dropped to 96 in November, down from 114.3 in October. But that October number was incredibly high. It almost beat the all-time high of 115.2 the index set in March 2006, at the height of the housing boom.

Since we're no longer in a housing boom, no one expected the index to stay up there. Most economists expected the index to fall by a few points, according to the market consensus at Yahoo Finance.
It seems economists underestimated the power of the federal homebuyer tax credit to move the market. The tax credit was supposed to have expired by November, prompting a scramble to close deals before it ended. The credit was later extended through April 2010. The rush to get in on the deal is the only reasonable explanation for October's mini-housing boom. By that logic, November's index would have been higher if many home buyers hadn't hurried to set their closing dates before the end of October.

The Realtors expect another run-up for the index this spring, as the credit is set to expire again.

Now, let's look a little deeper: I'm encouraged that the most overbuilt region in the country is still chipping away at its millions of unsold homes. Think of the wrecked housing markets of California, Phoenix, and Las Vegas. Yet homes are still going into contract in a big way in the West. The pending home sales index fell only 2.7 percent in the West in November, to reach a seasonally adjusted annual rate of 124.6 - high above the boom-time 2006 index rate of 109.6.

So pending home sales is not yet clear evidence that the housing market is softening again. And really, the harbinger of new housing trouble probably wouldn't come from the pending home sales index anyway. It would come from the number of foreclosures, which is still trending downwards for now, under pressure from the government's Making Homes Affordable program to modify home loans. If those temporary loan modifications aren't made permanent, however, or unemployment stays stubbornly high, foreclosure rates could rise again.

"The one continuing problem will be the foreclosures," says Lawrence Yun, chief economist for NAR. He expects foreclosures to continue at well above the normal rate for most of this year.

Pending Home Sales over the Last Year
November 2008 - 83.1
December 2008 - 87.1
January 2009 - 80.4
February 2009 - 82.0
March 2009 - 84.6
April 2009 - 90.6
May 2009 - 91.3
June 2009 - 94.6
July 2009 - 97.6
August 2009 - 103.8
September 2009 - 110.0
October 2009 - 114.3
November - 96.0
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