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Pending Home Sales Decline in January

The first month of the year saw a decline in pending home sales, according to a report released today by the National Association of Realtors.

The pending home sales index for January at 80.4 fell 7.7% from a downwardly revised reading of 87.1 in December. The index is also 6.4% below January 2008 when it was 85.9. The index is at the lowest level since the NAR began tracking pending home sales in 2001 when the index was set at 100.

Pending home sales reflect real estate transactions that are under contract, but have not yet gone to closing. The sale is typically finalized within thirty to sixty days from the signing of the contract.

Lawrence Yun, NAR chief economist, said, “Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales. We expect similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions and from the $8,000 first-time buyer tax credit.”

The first-time homebuyer credit introduced last year was actually an interest-free loan of $7500 that had to be paid back to the government over fifteen equal annual installments.

As part of the American Recovery and Reinvestment Act 2009, a new credit of $8000 is available for first-time homebuyers who close on their home on or after January 1, 2009 and before December 1, 2009 - and it's a freebie that doesn't have to be paid back, as long as you stay in your home for the next three years. (More on the $8000 homebuyer's credit in an upcoming article.)

While the index for pending home sales is down 7.7%, the numbers are skewed and most regions are actually a little worse off than indicated by the national average. The reason? The average declines were reduced by an increase in pending home sales in the West, up 2.45% in January to 103.6 and 13.5% higher than January 2008.

In the Midwest the pending home sales index in January dropped by 9.2% to 72.6 and is 13.8% lower than January of last year. The index in the South fell 11.9% to 82.2 in January and is 9.1% below a year ago. The index in the Northeast declined 12.7% to 57.8 and is 19.7% lower than it was a year ago.

But while prospective homebuyers are likely to be wary of buying a home during these uncertain economic times, homes have never been more affordable since the NAR began keeping track in 1970. The housing affordability index - which shows the relationship between home prices, mortgage rates, and family income - rose 13.6% from December for a new record high in January at 166.8.

The housing affordability index is a relative index where a value of 100 means that a median-income family has exactly enough income to qualify for a mortgage on a median-priced home, taking into consideration the relationship between median home prices, median family income, and mortgage interest rates for loans closed on existing homes. A higher index means housing is more affordable.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said it’s ironic with the weak housing market that affordability conditions have improved dramatically. “Housing affordability is at a record high – the buying power of a typical family has risen significantly,” he said. “With the drop in interest rates, a median-income family can afford a home costing $20,000 more than a year ago for the same monthly mortgage payment. With the strong housing stimulus, we are hopeful inventory will get trimmed and which will help prices stabilize in many areas by the end of this year.”

The NAR gives this example: The housing affordability index indicates a median-income family, earning $59,800, could afford a home costing $283,400 in January with a 20 percent downpayment, assuming 25 percent of gross income is devoted to mortgage principal and interest; affordability conditions for first-time buyers with the same income and small downpayments are roughly 80 percent of that amount. A year ago, the typical family could afford a home costing $263,300.

Yun added, “Conditions have been aligning very favorably for home buyers with the exception of consumer confidence. But I am hopeful that sales will turn around by late spring and early summer because history suggests that home sales can rise even in times of job losses when housing affordability rises.”

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Thursday, 09 July 2020

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