Pending Home Sales Rise Before Tax Credit Expires

With the federal home buyer tax credit serving as a tailwind, pending home sales rose a seasonally adjusted 5.3% in March, the National Association of Realtors announced Tuesday.

Economists surveyed by Bloomberg News had expected pending sales of homes to rise 4% in March, after a revised 8.3% increase in February. Pending sales declined 7.8% in January.

By region, in March pending home sales declined 3.3% in the Northeast, rose 1.2% in the Midwest, jumped 12.7% in the South, and increased 1.9% in the West. Pending home sales are now up 21.1% from a year ago.

Tax Credit, Affordability, Attract Buyers

Lawrence Yun, NAR chief economist, said home affordability is working in tandem with the tax credit to boost sales.

"Clearly the home buyer tax credit has helped stabilize the market. In the months immediately following the expiration of the tax credit, we expect measurably lower sales," Yun said in a statement. "Later in the second half of the year, and into 2011, home sales will likely become self-sustaining if the economy can add jobs at a respectable pace, and from a return of buyer demand as they see home values stabilizing."

Last year, Congress renewed and expanded the credit to $8,000 for first-time buyers and $6,500 for repeat home owners for purchases before April 30, 2010.

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

Investors should interpret March's rise in pending home sales as a positive development for the housing sector and the economy. As economist Yun noted, the tax credit has drawn potential home buyers into the market, and lower prices compared to housing boom-era peaks have made homes more affordable. That said, sustained job growth upwards of 100,000 new jobs per month will be needed to maintain the positive home sales trend in the quarters ahead.