Home sales gain but trouble looms

Pace of pending home sales inches higher in October over historic lows this summer, but advance is limited and forecast gloomy.

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By Chris Isidore, CNNMoney.com senior writer

Overall, the pending home sales index is down more than 18 percent from a year ago.
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NEW YORK (CNNMoney.com) -- More trouble looms for the nation's battered housing market next year, even as the pace of home sales inched up in October from the depths of this summer's mortgage meltdown, according to data released Monday by an industry trade group.

The National Association of Realtors reported that its Pending Home Sale Index, which charts the pace of sales contracts ahead of their closing, rose to 87.2 in October from a revised reading of 86.7 in September.

Overall, the pending home sales index is down more than 18 percent from a year ago, and remains below the reading of September 2001 when the terrorist attacks shook buyer confidence.

Looking ahead, the Realtors predicted that home sales are likely to decline - for the third consecutive year - in 2008.

"Things aren't getting much worse, but they're not getting much better either," said Mike Larson, a real estate analyst for independent research firm Weiss Research. "And keep in mind that unlike in the past, more of these pending sales won't actually close as buyers have trouble finalizing financing. I think it's going to be a muddle-through market for a while here."

The gain in the index for October was limited to homes in the western and northeastern United States. The sales index in the Northeast rebounded to an 80.6 reading in October after plummeting to 69.5 the month earlier.

The South and Midwest posted declines in October. The reading in the South, the region that sees nearly half of all home sales, saw a 7.8 percent decline on that basis and is still below the August number.

In August, when problems in the market for mortgage-backed securities caused many lenders to slam the brakes on home loans, the pending home sales index hit a record low of 85.5.

Lawrence Yun, the group's chief economist, said the data suggest that the worst of the problems are working their way through the market.

"The unusual mortgage disruptions that peaked in August were clearly seen in lower home sales that were finalized in September and October, so the market was under performing," Yun said in a statement. "Now that mortgage conditions have improved, some postponed activity should turn up in existing-home sales over the next couple of months, and I expect sales at fairly stable to slightly higher levels."

The trade group also put out its monthly forecast for future sales and home prices on Monday. The latest estimate trimmed its forecast for the pace of existing home sales for early next year, as well as its estimates of the median prices for existing homes sold this quarter and next. The price in the current quarter is now projected to be about 5 percent off from a year earlier, the sharpest drop expected this year and steeper than the previously forecast 4 percent decline.

And while the Realtors forecast a pick-up in median home price next spring and summer, the group said that number will then fall in the fourth quarter of 2008 and first quarter of 2009 due to the typical seasonal slowdown.

When looking at annual sales and prices, the forecast now projects the pace of existing home sales will go up 0.5 percent in 2008, it also forecast a 12 percent drop in new home sales next year. That means its forecast for combined sales of both types of homes is down 1 percent in 2008 - which would mark the third straight year of declines.

The Realtors again cut their estimate for the price of existing homes sold in 2007, a move they've taken virtually every month this year. This year will be the first full-year on record to post a price decline from the previous year.

Looking ahead to 2008, the group left the price estimate unchanged from the forecast it made last month, despite the lower price forecast in the first quarter. That means Realtors expect a 0.3 percent price increase next year.

The group continues to see a sharp drop in new home sales in 2008, while it expects 2009 new home sales to be down 0.2 percent, rather than the modest recovery in prices it was still forecasting a month ago.

The downturn in housing has hit the financial results of the nation's leading home builders. On Dec. 6, luxury home builder Toll Brothers (Charts, Fortune 500) reported its first loss in 22 years as a public company.

The decline in the value of builders' land and home inventory was further demonstrated on Nov. 30 when Lennar (Charts, Fortune 500), the No. 1 home builder by revenue, reported that it was selling 11,000 properties, including some completed homes, to the real estate arm of Wall Street firm Morgan Stanley (Charts, Fortune 500) for only 40 percent of its previously stated value.

Charges due to reduced land and home valuations have caused many builders to report larger-than-expected losses recently. D.R. Horton (Charts, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss Nov. 20, but that followed a quarter with a loss that was much wider than forecast. On Nov. 6, Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 6 builder by revenue, reported that the pace of sales in October "significantly deteriorated" in most of its markets. It also said preliminary results showed a sharp rise in cancellations.

In October, credit rating agency Moody's downgraded the debt of Lennar, No. 2 builder Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status.  To top of page

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