The National Association of Realtors is trumpeting a fourth consecutive monthly gain in their report of pending home sales. The index tracks the number of contracts signed on homes, which increased in May by just 0.1% from the previous month. Pending sales are up 6.7% from a year ago.

In the past those contracts would give a pretty good indication of what existing home sales would look like when the NAR reports its May numbers a few weeks later. These days the report’s reliability as an indicator is shakier. More pending sales appear to be falling through, as financing becomes harder to reach or as buyers and sellers renege on pricing.

In April, for example, contracts signed on homes rose 6.7% from the previous month, but existing home sales in May—when a lot of those contracts should have closed and been reported—increased by just 2.4%. Indeed, for nearly a year, the pending home-sales index appears to be over-predicting closed sales relative to historical levels, notes independent housing economist Thomas Lawler.

Here are three reasons why:

Mortgage Rates: April and May figures should face pressure because mortgage rates spiked sharply at the end of May, rising from around 5% to as high as 5.79%, according to HSH.com. While rates have resettled into the mid 5% range since then, that’s still up from springtime lows that went as low as 4.75%. Some buyers won’t be able to get financing at higher rates; others will probably reconsider buying.

Short Sales: Another big factor for the de-linking of pending and existing home sales are short sales, where a home is sold for less than amount owed to the bank on the property. Realtors often mark short sales as “pending” once a buyer and seller have agreed on a price—even though the bank still must sign off on the transaction. When that doesn’t happen, the pending sale falls through.

Appraisals: Also, in cases where appraisals come in lower than the sales price, the buyer may decide to back out of the transaction.

New appraisal rules that Realtors say are too conservative bore the brunt of the blame from Lawrence Yun, the NAR’s chief economist, for the higher fall-out of pending sales. “Speedy clarification of the appraisal rules could smooth a housing market recovery and support the overall economy,” he said in a news release.

File Under: Real Estate Spin

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Source: Wall Street Journal Blog