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Home Purchase Contracts Decline in Strong Market

Posted by Joseph Trevisani on Jul 29, 2015 11:13:00 AM

The number of American signing contracts to buy homes fell unexpectedly in June but the market remains near its post-recession peak.

The index of pending home sales dropped 1.8 percent to 110.3 from 112.3 in May, reported the National Associate of Realtors today in Washington.  It was the first decline this year. Economists in the Bloomberg survey had forecast a 0.9 percent gain.

May's reading for this index had been the highest in nine years. In May 2006 it registered 112.5 as the housing bubble was deflating from its 127.0 top of July 2005.

Pending home sales track signed contracts for previously occupied homes. These purchases become existing home sales when the home changes hands at the contract closing. A certain minor percentage of pending sales never close, usually due to the failure to obtain a mortgage. 

June's result for pending sales, along with the 5.49 million annualized rate for existing home sales portray a housing market near its historical averages.

The lifetime average for the pending index which started in January 2001 is 102.1. The historical average for existing home sales, which goes back a little further to January 1999, is 5.27 million units per year. Both measures have recovered smartly from their post-bubble lows, for the pending index at 76.4 in June 2010 and for existing sales at 3.45 million annualized in July 2010. 

The housing market has been supported has been supported for seven years by mortgage rates well below their historical norm.

The Federal Reserve has fostered this policy by keeping its own benchmark Fed Funds rate at 0.25 percent since December 2008 and by its various quantitative easing programs which by purchasing fixed rate securities directly pushed up bond prices and lowered market rates.

The Fed is expected to keep the Fed Funds rate unchanged at its FOMC meeting today and to provide clarification about its rate policy including the potential for a Fed Funds rate increase in September.

The average interest rate for a 30 year mortgage over the past 18 years is 5.50 percent, according to Bankrate.com.

This year and last the average rate for a 30-year fixed rate mortgage has been 4.11 percent. Yesterday the nationwide average according to bankrate.com was 3.98 percent. Since the end of the recession in June 2009 this most popular mortgage has averaged 4.29 percent. 

Longer term information from the Freddie Mac U.S. mortgage market survey shows that the average interest rate on a 30-year mortgage since 1985 has been 7.11 percent.

Mortgage rates have declined steadily if unevenly over the past 30 years from a peak of 12.17 percent in September 1985 to a low of 3.32 percent in November 2012. They have since inched back to 4.04 percent in July according the government data.  

Two of four regions in the country registered a decline in contracts  from a month earlier, with the South and Midwest both showing 3 percent decreases.

Purchases rose 11.1 percent in June from the previous year, following a 7.9 percent increase in the 12 months to May, the association noted.

The pending home sales index is based on the average level of contracts in 2001 which corresponds with a score of 100. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

pending july 29

bankrate july 29

freddie mac july 29

 

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