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Subprime Woes Contribute To Dip In Pending Home Sales

Wall Street Rallies on Not-So-Bad News

April 3, 2007

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Subprime lending problems may continue to put a damper on short term real estate activity, according to the National Association of Realtors. In a report on pending home sales, NAR says closings will be down in the March-April period.

The Pending Home Sales Index, based on contracts signed in February, stood at 109.3 -- down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Bad weather may also have contributed to the decline, just as mild weather caused the index to spike at 113.3 in December.

But Wall Street was cheered by the news. Although the index is well below where it was a year ago, it's stronger than investors expected, reassuring them that the housing sector, while weak, is not being pummeled by the struggling subprime mortgage sector, analyzed surmised.

"If it wasn't for the unusually bad weather in February, we'd be seeing a better performance in pending home sales," said David Lereah, NAR's chief economist. "We also may be seeing some fallout from a decline in subprime lending, but a slight improvement in the more volatile month-to-month index is encouraging -- the data suggests an underlying stabilization is taking place in the housing market, but it will take another month or two to clarify."

"Problems in the subprime mortgage market will become more apparent over time, and they will modestly depress the overall level of improvement in existing-home sales we expect as the year progresses," Lereah said.

The index is a leading indicator for the housing sector, based on pending sales of existing homes. 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.

An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined and the first of five consecutive record years for existing-home sales. There is a closer relationship between annual changes in the index and actual market performance than with month-to-month comparisons.

As the relatively new index matures and seasonal adjustment factors are refined, the month-to-month comparisons will become more meaningful over time.

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