December 3 2010 (Shirley Allen)

The Pending Home Sales Index (PHSI), a forward-looking indicator released monthly by the National Association of Realtors (NAR), rose 10.4 percent to 89.3 based on contracts signed in October compared to 80.9 in September.

The index remains 20.5 percent below October 2009 when first-time home buyers were motivated to make offers before the initial contract deadline for the first tax credit in November of last year.

The PHDI reflects contracts and not closings, which normally occur after a lag time of one to two months after the contract is signed.

The PHSI in the Northeast jumped 19.6 percent to 71.3 in October but is 27.3 percent below the tax credit peak in October 2009. In the Midwest the index surged 27.3 percent in October to 81.7 but is 24.8 percent below a year ago. Pending home sales in the South rose 7.1 percent to an index of 93.8 but are 18.4 percent below October 2009. In the West the index slipped 0.4 percent to 104.3 and is 15.6 percent below a year ago.

Lawrence Yun, NAR chief economist, said excellent housing affordability conditions are drawing home buyers. “It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” he said.

Yun also stated that a return to more normal loan underwriting standards and removal of fees for low risk borrowers is needed and could help stimulate housing and the economic recovery.

Data released by Fannie Mae and Freddie clearly demonstrates that the default rate on recently originated loans is very low, even lower than the very low default rates before the housing boom in 2002 and 2003.

Yun revealed that he expects home sales will continue to climb from their lows of last summer and that he has concerns about the Deficit Commission’s suggestion that the mortgage interest deduction be halted as a means of reducing the deficit.

“Preliminary results of a new survey show nearly three out of four home owners and two out of three renters consider the mortgage interest deduction to be extremely or very important to them. Home owners already pay between 80 and 90 percent of all federal income taxes and additional tax burden would hurt them and the economic recovery, so we have a reasonable hope that it will not be changed.”

Tags: NAR, pending home sales, housing affordability, improving job market, underwriting standards, economic recovery, low default rate, home sales, mortgage interest deduction