Pending Home Sales Plunge In April

When consumers are paying $4 a gallon for gasoline, they aren't much in the mood to think about buying a home. That's the National Association of Realtors' (NAR) explanation for April's plunge in pending home sales – a reflection of sales contracts signed, but not yet closed.

NAR's Pending Home Sales Index dropped 11.6 percent and is now 25.6 percent below a cyclical peak in April 2010, when buyers were rushing to get in under the deadline for the home buyer tax credit. With a glass-is-half-full outlook, NAR chief economist Lawrence Yun says the drop in sales may be due to temporary factors.

“The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months,” he said. “The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.”

Declines in spending all the way around

Yun notes the growth in retail sales slowed measurably in April, while sales at furniture and home furnishing stores declined sharply.

“Nonetheless, the magnitude of the fall in pending home sales is larger than can be implied by broad economic factors, so we need to see if it’s just a one-month aberration,” he said.

Yun said tight credit is the primary long-term factor holding back the market. A tight mortgage underwriting process, he says, is making the housing market recovery unnecessarily slow.

Banks need to let go of some cash

“Lenders and bank regulators need to be mindful of the historically low default rates among mortgage borrowers of the past two years,” he said. “A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves.”

For the housing market to recover, Yun says, banks have to get back to what he calls sound, common-sense lending standards to provide mortgages to credit-worthy borrowers who are buying homes well within their means.

“Bank balance sheets show rising cash reserves and declining loan balances – it’s time to loosen the purse strings,” Yun said.