January 26, 2012 (Chris Moore)

Contract signings fell by 3.5 percent in December as the Pending Home Sales Index (PHSI) declined from 100.1 in November to 96.6 in December according to the National Association of Realtors® (NAR).

The decline in home purchase contracts follows two months of increases but still leaves the Index 5.6 percent higher than in December of 2010.

Lawrence Yun, chief economist of NAR, stated, “Even with a modest decline, the preceding two months of contract activity are the highest in the past four years outside of the homebuyer tax credit period.”

A high level of contract failures has been added to an already difficult list of tasks for NAR members. For the third consecutive month, nearly one in three NAR members reported at least one contract cancellation in December. (See: Existing Home Sales Up, Contract Failures Still High)

“Contract failures remain an issue, reported by one-third of Realtors® over the past few months, but home buyers are not giving up. Housing affordability conditions are too good to pass up. Our hope is lending conditions will gradually improve with sustained increases in closed existing-home sales,” Yun added.

Most contract failures are caused by declined mortgage applications or low appraisals but can also be caused by home inspection problems and employment losses. Some sales are still completed after the contract delay; while others will go on to make another offer.

Three of the four regions in the Index experienced declines in their monthly level of sales contract activity while the same number of regions posted higher levels of activity than the previous year.

In the Northeast, monthly contract signings declined by 3.1 percent to 74.7, the West region fell 11.0 percent to 107.9 and the South posted a loss of 2.6 percent, falling to 101.1. The Midwest was the only region to experience a gain in monthly contract signings, increasing 4.0 percent to 95.3.

Compared to December 2010, the Midwest was 13.3 higher, the South gained 4.9 percent and the West was 3.7 percent higher while the Northeast posted the only year-over-year decline of 0.8 percent.

The PHSI is a forward looking indicator which generally indicates closings one to two months in the future.

Tags: pending home sales, existing home sales, contract signings, contract cancellations