September's Drop in Pending Home Sales Suggests Uneven Recovery

Pending home sales in the U.S. unexpectedly fell 1.8%

in September, the National Association of Realtors reported Friday. It was the statistic's first decline in three months, and one that suggests that the housing sector's recovery is likely to remain uneven through at least early 2011.

The consensus of economists surveyed by Bloomberg had been that sales of pending homes would rise 3% in September, after a revised 4.4% gain in August, and a 4.5% increase in July.

Pending sales for the month were 24.9% below their September 2009 levels, and that's worse than the 20.1% year-over-year decline recorded in August. That decline occurred despite the fact that the total was likely skewed somewhat higher by Congress's extension of the closing deadline for the home buyer credit to September 30, 2010, from June 30, 2010. The extension meant that buyers who purchased homes by April 30 had three additional months to close on the transactions and take advantage of the tax credit, which may have drawn out the stimulus effect.

However, as noted, whatever effect that may have had was not enough to push the pending home sales figures higher in September, when they fell in three of four regions. Sales dipped 1.7% in the Northeast, 5.7% in the Midwest, and 3.5% in the South, but rose 3.5% in the West.

Many Factors Affecting Housing Sector

Lawrence Yun, NAR chief economist, said multiple factors are affecting home sales, some to the benefit of housing market, some working against it.

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"Existing-home sales have shown some improvement but the foreclosure moratorium is likely to cause some disruption and contribute to an uneven sales performance in the months ahead," Yun said in the NAR's statement. "Nonetheless, there appears to be a pent-up demand that eventually will be unleashed as banks resolve their issues with foreclosures and the labor market improves. However, tight credit and appraisals coming in below a negotiated price continue to constrain the market."

Even so, Yun added that the NAR still expects housing market to improve in 2011.

"For 2011 we should see more than 5.1 million existing-home sales, up from about 4.8 million this year. Housing starts are expected to rise to 716,000 in 2011 from 598,000 this year," he said, adding that he expects pent up demand to put upward pressure on sales once the U.S. economic recovery strengthens.

Job Growth Is a Good Sign

In general, economists view the new and existing home sales statistics as more accurate indicators of housing sector activity than the pending home figure, due to the number of those sales that fall through as a result of mortgage problems, title issues, liens, and other complications.

The September pending home sales report signals a setback in the housing sector, and supports the argument of the economic bears. Economist Yun makes a fair argument that pent up demand could propel home sales higher in 2011, assuming the U.S. economy maintains a job growth rate of 150,000 to 200,000 jobs per month. The economy added a much better than expected 151,000 jobs in October -- its best performance in five months.

However, if job growth at that rate does not continue for many quarters -- and a single positive monthly job report is not nearly enough to conclude that the economy has progressed to a self-sustaining expansion -- Yun's forecast probably won't come to fruition. Given the number of jobs the economy will have to create to return the housing sector to health, home buyer caution at this juncture is not an unreasonable stance.

Gary Shilling, president of economic consulting firm A. Gary Shilling & Co., is in the "home buyers beware" camp. Shilling, in an interview with DailyFinance, says things are likely to get worse in the housing sector before they get better. Due to the level of excess inventory, he speculates that home prices could fall another 20%.