Pending Home Sales: How does affect the Homebuyer or seller in Southwest Florida?

As published in The News Press

By D. Michael Burke

While we definitely like to keep an eye on our own market here in Southwest Florida, we also need to pay attention to what is going on nationally. We know our market is unique, BUT there is activity happening on a national level that will give us clues about our own market. The point is we should be paying attention to national activity as well as local activity, so we can ascertain the full picture about Southwest Florida.

Once such piece of activity of particular interest is Pending Home Sales. After falling for three straight months, the index that tracks the number of U.S. home buyers signing contracts to purchase existing homes took a high leap in October 2011, reaching the highest level of 2011. The National Association of Realtors’ (Realtor.org) reported that the seasonally adjusted index for pending sales of existing homes increased 10.4% on a monthly basis to 93.3, the highest reading since November 2010. October’s results were more than 9% above the same month in 2010.

Additionally, pending sales rose in three out of four U.S. regions. The biggest increase of 24.1% was in the Midwest. They rose 17.7% in the Northeast and 8.6% in the South and fell 0.3% in the West. Sales of both new and existing homes have been running higher than a year earlier. Prices, however, still remain weak nationally, given the overall uncertainty about high unemployment and the difficulty of getting home loans.

The increase still came despite warnings by other housing industry groups concerned about a decline in the maximum size of loans that can be backed by mortgage giants Fannie Mae, Freddie Mac and the Federal Housing Administration. Those limits fell on Oct. 1, though Congress later voted to increase the limits for FHA, which guarantees loans to buyers with down payments as low as 3.5%.

Additionally, three industry watchers had this to say:

Steven Wood, chief economist, Insight Economics: “This report suggests that home re-sales should be stronger over the next couple of months but at a level that is still fairly subdued. Pending homes sales have fluctuated within a relatively narrow range over the past year at an average level that is still relatively subdued.”

Michael Rehaut, builder analyst, J.P. Morgan: “We view today’s data point as more of an outlier when contrasted with several other major indicators of housing demand as reported over the last two weeks, which have demonstrated changes in the range of 1-7% … Hence, we continue to view demand overall as remaining stable to only slightly improving.”

Ian Shepherdson, chief U.S. economist, High Frequency Economics: “The index dropped by a total of 7% over the previous three months, so this is mostly a rebound rather than a surge from a steady trend, but it is welcome nonetheless. It also is consistent with the recent strengthening in homebuilder sentiment and the modest pick-up in mortgage applications. In short, something seems to be stirring in the housing market, though we would certainly hesitate before calling a definitive start of a recovery.”

Millan Mullraine, senior U.S. macro strategist, TD Securities: “Given that pending sales capture the initial signing agreement for the purchase of a home, it is a very good predictor of existing home sales one month ahead. “

What does this mean for our market?

First, let’s review the facts. A sale is considered pending when the contract has been signed but the transaction hasn’t closed. Pending sales typically close within one or two months of signing. A reading of 100 is considered healthy and is equal to the average level of activity in 2001.

So in our market, the question is how many of those pending homes sales are based on financing? Pending home sales go up, but actual closings may be questionable. Some of these closings collapse because buyers can’t get financing. However, in Southwest Florida we are seeing an increased percentage of cash deals in the $500K and below pricing point, as well as the luxury market; both from investors and buyers looking for that vacation or retirement home. Since the majority of homes sold here are cash, the likely hood of those deals staying together increases in our market.

Another factor contributing to the pending home sales in the Southwest Florida market are rental rates are increasing. Historically, there’s typically been a strong correlation between rising rental rates and rising home prices. However, that correlation has suffered in the recent years because of the downturn in the housing market. But with rental rates now well into long-term gains here in Southwest Florida, pressure is mounting for renters to jump to home ownership if only because it’s becoming cheaper to buy than to rent in a lot of markets and at a lot of price points.

Overall, pending home sales nationally is a good sign for our market and with cash deals and rising rental costs, Southwest Florida will experience additional sales activity in 2012 as the market begins to recover nicely. If you want to sell your Southwest Florida home or buy a home in the market, be sure to have all the facts so you know your investment is sound. You’ll need a Realtor^® that knows the market and can make accurate assessments based on his/her local and national knowledge. Find the RIGHT Realtor^® …you’ll be glad you did