Pending Home Sales: Decline Highlights High-Inventory Problem

Pending homes sales declines suggests high inventory problemForget that home prices are stabilizing and new-home sales are rising, it's the amassing inventory of homes that could mire the housing market's recovery.

According to The Wall Street Journal, the decline in the pending-home-sales index indicates that inventory is rising, meaning there are too many houses and too few buyers.

Pending sales -- signed contracts on the purchase of new homes -- had fallen 3 percent in June compared to the previous month, according to data released Tuesday by the National Association of Realtors. That's a further decline from May, when the index sank 30 percent on the heels of the April 30 deadline for the homebuyer tax credit.

If fewer homes are being bought and developers continue to build, then a smaller piece of the backlog of vacant homes (about 2.5 million nationwide) are being consumed. So the question is, if unemployment and economic conditions remain stagnant, how long will the inventory last?
Given no change in the economic climate, Standard and Poor's estimates that it could take three years to clear the backlog of homes. Most experts arrive at this calculation by considering that, on average, the U.S. grows by 1.4 million households per year, and there were approximately 550,000 new housing starts in 2010. That means that each year 850,000 units might be filled out of 2.5 million existing and vacant properties (850,000 times three is just over 2.5 million).

But if the inventory problem worsens, economists say, it will only take longer, and further delay an overall economic recovery.

A larger glut of homes will further push prices downward, which in turn depreciates values for homeowners, and increases delinquencies for homeowners. Meanwhile, greater supply lowers the demand for homes, which threatens the profits of builders and the jobs of their employees, as well as those who work in the housing service industry, such as real estate agents and mortgage brokers.

Prospective homeowners, however, can continue to reap the benefits of bargain prices and a buyer's market, but then again, none of us are impervious to the effects of a lackluster economy.

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