U.S. pending home sales fell more than twice the consensus expectation in July, falling by 3.2% in the month following an upwardly revised 5.8% rebound in the previous month. The report fails to indicate a bottoming out in the housing sector, economists say, though the pace of decline is slowing and falling mortgage rates should help sales in the rest of the year.

Millan Mulraine, economics strategist at TD Securities, said the 6.5% annual decline in July is a big improvement from the 11.6% annual drop recorded in June, but he said the report does not suggest a bottoming in the housing market. "Rather, there is every indication that while the sector continues to deteriorate, the pace of decline appears to be moderating," he said.

The index now stands at 86.5, down from the previous month's 89.0 reading. Since July 2007, the index has fallen from 92.8.

Patrick Newport, U.S. economist at Global Insight, said the trend in pending homes is sideways and this month's index suggest the existing home sales index should fall by 2%, following a 3.1% gain in July. The oscillating trend in existing sales has been fairly narrow since October, he added.

Lawrence Yun, chief economist at NAR, said home sales continue to edge up and down. "Pending home sales are oscillating month-to-month, with the long-term trend essentially flat," he said. "Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings."

The Pending Home Sales Index looks at home sales that have been signed but not finalized, a process that takes another month or two. The value of the index lies in its ability to forecast existing home sales, which represent eight-tenths of the market.

The NAR projects the 30-year fixed-rate mortgage rate to trend up to 6.6% by the end of this year and edge up to 6.7% in 2009. NAR also said the housing affordability index is likely to remain favourable throughout 2008, averaging 13 percentage points higher than last year.

However, Global Insight's Brian Bethune said the government's takeover of Fannie Mae and Freddie Mac could have radical changes on the housing market. He noted the 30-year rate has already fallen below 6% - according to Bankrate.com, Tuesday's rate is 5.88%, down from 6.26% last week - and that downward trend should continue in the coming months. "What's happening is that banks are being aggressive now, anticipating that rates will come down," he said.

Bethune said the implicit guarantee on GSE debt reduces risk and should cause the funding spread to decline, but it's unclear just how much it could decrease. He predicted on Monday that the spread would fall by 30 basis points over the next several weeks, but that's already occurred now.

"The future is getting telescoped into the present," he commented, noting that rates should continue to fall as inflation moderates, bond yields soften and oil prices continue to drop.

Walter Malony, spokesperson for the NAR, said the housing outlook remains cloudy. "The takeover of Fannie and Freddie should lead to lower interest rates, but we aren't making that assumption yet on our forecast," he said. "If lending criteria remain too stringent, lower rates won't help that much. However, if we return to normal sound lending standards, we should see a nice lift to home sales in coming quarters."

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008