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Tuesday, June 2, 2009

Some Thoughts on the Existing Homes Numbers

The latest pending home sales numbers are in and in April they are up 6.7%. Now, I have made no secret of my own pessimism in our economy. So, many could say that I analyze all economic data through that prism, however, I still see plenty of skepticism in these numbers. There are those that say that these numbers, the third positive month in a row, are proof that the housing market has rebounded.

This is yet another positive indication that the bottoming process is forming," Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients.

I, however, am not one of those folks. The first important thing to understand is that this is PENDING home sales. This number measures the number of real estate purchase contracts signed in the month of April. It doesn't measure the number of properties closed in the month of April. While no one pretends as though anywhere near 100% of contracts actually close, normally this is not an important factor. There is a fairly easy to factor variation between contracts signed and homes closed. We are NOT in one of those times. So, while sales contracts may in fact be up, sales aren't necessarily up. Unfortunately, that isn't measured, at least not in these numbers.

Second, the months of March, April, and most of May saw extremely low interest rates. So, real estate contracts should have naturally gone up as buyers took advantage of historically low rates. In the last week, we have seen rates go up a half a percent. It's still unclear whether or not they will fall back but there's a larger question. Will real estate continue pushing upward when rates do go up permanently? It's one thing for sales to increase when interest rates are at historic lows and another when they are at more reasonable levels.

Finally, real estate values were falling at the same time that real estate contracts were rising. Here's how Jennifer Lee finished her analysis.

"Now if only prices would stabilize."

There's always a price at which you can spur business. As prices continue to drop, especially with really low rates, of course buyers are going to step in that. That doesn't necessarily mean that real estate has stabilized. Also, while these numbers are up, they're also coming off all time lows. It's sort of like getting excited about a career .150 hitter now hitting above the Mendoza line (that's a .200 hitter for all non baseball fans). Sure, they're up but they're up off really low levels.

It does say that the free fall has stopped, but I never bought the doom and gloom of a total collapse when it was being preached. I am also not buying all the confidence now. The numbers in June, when rates will be higher, will be much more critical than those in April. We still have plenty of economic data to analyze before we declare victory. These numbers are positive but, in my opinion at least, they are rather insignificant and plenty of more important data still left.

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