Pending home sales at record low
Realtors report shows sharp drop in homes under contract, as mortgage lenders shut off financing needed to close deals.
NEW YORK (CNNMoney.com) -- The meltdown in the mortgage market in August dried up the supply of homeowners looking to sell, as an industry group reported the lowest recorded level of homes under contract.
The National Association of Realtors' pending home sales index fell to a record low of 85.5 from an upwardly revised 91.4 reading in July. That broke the previous low of 89.8 in September 2001, the period in which the terrorist attack shook buyer confidence. The trade group started the index in 2001.
This time the hit to home sales came from buyers having trouble finding the financing they needed to buy homes, coupled with the reluctance of some buyers to jump into the battered market.
"Fewer contracts were being written because of mortgage availability issues, and a separate internal survey of our members shows more than 10 percent of sales contracts fell through at the last moment in August, primarily the result of canceled loan commitments," said a statement from Lawrence Yun, senior economist for the group. "The volume of activity we're seeing today is below sustainable market fundamentals because some creditworthy people are trying to buy homes but can't because of the credit crunch."
The drop was worse than expected by economists surveyed by Briefing.com, who had forecast only a 2 percent decline from the previous reading to 88.1. The index fell 21.5 percent from year-earlier levels, the biggest 12-month drop ever recorded, as the one-month decline of 6.5 percent was third biggest drop on record, trailing only July of this year and the September 2001 period.
Numerous mortgage lenders pulled back from the market in August as they had trouble selling securities backed by mortgages on the secondary market. Several, including Countrywide Financial (Charts, Fortune 500), the nation's largest writer of mortgages going into the month, tightened its loan standards and stopped making some types of loans they had commonly made in the past. Other lenders also pulled back from the market.
So called jumbo loans, or those for greater than $417,000, were particularly hard hit by the mortgage meltdown, and that caused severe problems for sellers of more expensive homes.
"In some areas, as much as 30 percent of signed contracts were falling through in August when the credit crunch problem peaked," Yun said. "The problem has since become less severe, though jumbo loan rates are still higher than they would be under normal conditions. Therefore, sales activity in late fall will better reflect market fundamentals."
Michael Bizenov, president of Sterling National Mortgage, the home lending arm of the New York bank of that name, said that the market is starting to show signs of returning to normal but is not back to the conditions before the summer's mortgage crunch.
"The lenders who chose to be on the sidelines are pretty much still on the sidelines," he said. "I think we'll see that start to ease, but I don't think we'll see an avalanche."
While some markets were hit harder than others, no region of the country escaped the downturn in August.
All four regions tracked by the Realtors - the Northeast, Midwest, South and West - saw declines. The South, which accounted for nearly 40 percent of existing home sales during the real estate boom of 2003-2006, posted a one-month drop of 9.5 percent, the sharpest decline of any region. All are down 18 percent or more from a year earlier.
The pending home sales report does not include any information about prices. But the sharp drop in the pace of sales in this reading, particularly for the larger homes, suggests that the more closely watched existing home sales reports for September and October will show continued declines in both the pace of sales and the median home price.
The existing home sales report tracks sales at the time of closing, while pending home sales measures those homes under contract.
Mike Larson, a real estate analyst with independent research firm Weiss Research, said that he would expect that the pending home sales might show some improvement going forward. But he doesn't believe it will be the sharp rebound seen after September 2001.
"I wouldn't be surprised to see a rebound from these truly awful numbers in the fall, in September or October," he said. "The credit markets are a little better than in August. But I'm certainly not expecting a strong, lasting surge. I think the existing home markets will stay weak into back half of 2008 and perhaps into 2009."
Economic fundamentals will be the next drag on home sales, Larson said. In August, the Labor Department reported its first drop in four years in the number of workers on U.S. payrolls. Meanwhile, economic growth is slowing.
Larson said that market psychology will also keep the pace of sales weak, as home shoppers who are having trouble getting what they want for their current home will pull out of the market, while other potential buyers decide to wait to see if the price of homes they want to buy continue to slide.
"It's the polar opposite of what we saw in '05 when people thought, 'If I don't buy now, I'll be priced out forever,'" he said. "Now they think it makes sense to wait."
Bizenov agrees that market psychology is working hand-in-hand with the mortgage crunch to keep sales on hold.
"The sellers are still looking at the price their neighbor got two years ago, and the buyers are looking for the mythical 30 percent price cut and they're both wrong," he said. "It'll take some time for the stalemate to end."