The National Association of Realtors this morning released November Pending Home Sales data.

A sale is listed as "pending" when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. Mortgage and Real Estate professionals know that a signed contract is just the first step in a long process nowadays though. The hard part is qualifying and closing!

Pending Home Sales, Housing Starts, and Building Permits are considered more forward looking/timely than other housing indicators like Existing Home Sales. Pending Home Sales are not as forward looking as Housing Starts and Building Permits though...

In October, the Pending Home Sales Index, increased 3.7 percent to 114.1 from 110.0 in September. This was 31.8 percent above October 2008 when it was 86.6. The year over year expansion was the biggest annual increase ever recorded for the index.

In the data released today, which reported on contract activity in November, the pending home sales index fell more than expected to 96.0 from a revised higher read of 114.3 in October. This was a 16.0 percent decline, much worse than the 2.0 percent contraction economists had forecast.

Regionally, Pending Home sales were:

• -25.7% in the Northeast, 14.7% above a year ago.
• -25.7% in the Midwest, 9.2% higher than November 2008.
• -15.0% in the South, which is 14.7% above a year ago.
• -2.7% in the West, 21.4% above November 2008 levels

(I find it remarkable that both the NE and MW fell exactly 25.7%)

The chart below graphs the Pending Home Sales Index. I highlighted months of growth in GREEN and months of contraction in RED. Notice the decline in November put a halt to nine consecutive months of growth (which was a function of seasonal support and goverment stimulus).

Lawrence Yun, NAR chief economist, said a drop was expected...

I can't argue with him, this is what he said last month:

Yun cautioned that home sales could dip in the months ahead. “The expanded tax credit has only been available for the past three weeks, but the time between when buyers start looking at homes until they close on a sale can take anywhere from three to five months. Given the lag time, we could see a temporary decline in closed existing-home sales from December until early spring when we get another surge, but the weak job market remains a major concern and could slow the recovery process.

Looking forward, Yun says to expect gains this spring:

“It will be at least early spring before we see notable gains in sales activity as home buyers respond to the recently extended and expanded tax credit.  “The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own. We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires.”

FYI: Home buyers who have a contract in place to purchase a primary residence by April 30, 2010, have until June 30, 2010, to finalize the transaction to qualify for the tax credit of up to $8,000 for first-time buyers and $6,500 for repeat buyers.

Yun projects an additional 900,000 first-time buyers will qualify for the extended tax credit in addition to about 2 million who have already purchased; 1.5 million repeat buyers also are expected to benefit from the credit.

“Many trade-up buyers, who have historically timed their purchase based on school-year considerations, will have to accelerate their buying plans if they need the tax credit to make a trade,” Yun said.

FYI: Repeat buyers do not have to sell their existing home to qualify for the credit, but they must occupy the home they buy as their primary residence.

Yun added that mortgage interest rates cannot remain at rock-bottom levels for a sustained period and will likely inch higher in 2010. But the tax credit impact in the first half of the year and expected job growth impact in the second half will support home buying activity and absorb enough inventory to bring a rough balance between buyers and sellers. Home prices are expected to stabilize or even modestly rise as a result in 2010.

In regards to Yun's outlook regarding home price stabilization above...this is a real toss up and one of the reasons why economic outlooks remain so uncertain (risk of double dips).

The issue with home price appreciation expectations: Will government mortgage modifications be successful? Is there another wave of foreclosures lurking in the shadows?

Unfortunately this is largely a function of the labor market, which is a factor of consumer spending, which is a function of the labor market. Uh oh....this is one big CHICKEN OR THE EGG causality dilemma! What will come first...growth in consumer spending or labor market expansion? Or neither?

I acknowledge that conditions in the labor market are improving after a year of contraction, but in order to see a drastic turn around in consumer demand, there needs to be a drastic turn around in consumer spending.  We are just coming out of a massive cost cutting cycle and reduction in business inventories. During the recovery process, the contraction in business inventories will likely lead to periods of growth in manufacturing and an uptick in GDP, unfortunately this will be a bit misleading to most because structural weakness will remain as hiring is likely to remain slow while productivity is extremely high and consumer demand unstable READ MORE ABOUT PRODUCTIVITY. This implies we will see only temporary spikes in hiring...and a very choppy recovery in consumer spending....and therefore it's hard to believe that loan modification programs will be a major success. 

Obviously I am still not feeling "warm and fuzzy" about the health of the housing market...and I didn't even discuss the GSE mess or a possible crowding out in the rates market or contracting credit conditions or the Fed's exit from the mortgage market.  Macroeconomic structural inefficiencies (labor market/resource slack) are a large enough reason to be bearish about housing, I don't think I even need to drive the point home any further.

The market has some real "issues" to address (discount) in the future. What came first, the chicken or the egg? This is going to be a slow, stagnant, frustrating recovery...go back to school if you are out of a job.