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Tuesday, October 02, 2007

More on Pending Home Sales

by Calculated Risk on 10/02/2007 02:04:00 PM

Kelly Evans at the WSJ presents a chart comparing pending home sales to existing home sales. The chart uses a 1.5 month lag between pending and actual sales. See WSJ: Where Is the Bottom?

Adjusted New Home Inventory
The WSJ credits: "Source: Lehman Brothers; Note: latest existing home sales reading is a forecast"

The 1.5 month lag suggests that the sharp drop in contracts signed during July (the July pending home sales index was revised to a 10.7% decline), only partially impacted August existing home sales - and will also impact existing home sales in September. The same is true for contracts signed in August; we will see a portion of the impact of fewer contracts in the September existing home sales report, and the remainder in the October report.

Evans at the WSJ adds:

On the bright side, economists are hopeful that the number can only go up from here, as mortgage lenders relax a bit from August’s panic.
Maybe not. We have to remember that existing home sale activity is still above the normal level.

Existing Home sales and inventoryClick on graph for larger image.

This graph shows annual existing home sales since 1969 (and inventory levels since 1982). (Note: 2007 is the August seasonally adjusted annual rate of sales).

The current sales rate is still above normal historical levels - even if sales fall 6% to 10% in September (as suggested by the pending home sales index).

Existing Home sales and inventory as a percent of owner occupied units
The final graph shows sales and inventory as a percent of owner occupied units. This normalizes sales for increases in population and changes in household size.

Sales would have to fall to about 4.6 million units (SAAR) to reach the median level of sales as a percent of owner occupied units for the last 35 years. So even if sales fall to 5 million or 5.2 million units in September, sales could fall further. So the hopeful view that "the number can only go up from here" is probably overly optimistic.