Economists say the surprise gain in U.S. pending home sales in August doesn't mean the worst times in the housing market are over, but the advance in sales is at least a step in the right direction.

U.S. pending home sales unexpectedly soared by 7.4% in August, according to the National Association of Realtors (NAR) on Wednesday. The advance is the largest monthly gain in almost seven years, and follows a 2.7% decline in July and a 5.8% rebound in June.

"The pending home sales index has been very volatile in recent months, but it is fair to say there has been a clear uptrend," said ING's Dimitry Fleming. He noted that sales are now up 5% annually, a much better trend than the -24% year-over-year change reported in late 2007. In addition, this is the first gain in annual sales since September 2005.

"Rising foreclosures, giving bargain hunters free play, seem to be the main reason for the pickup. Indeed, while home sales rose modestly in most regions, buying activity in the West - where foreclosure activity has been highest - surged 29% [month-over-month, seasonally unadjusted] in August," he added.

Yet Fleming said he remains "very worried" about the U.S. housing market, emphasizing that this data pre-dates the market turmoil in September.

Similarly, economics strategist Millan Mulraine from TD Securities said that while the tone of the report was "very positive" and could translate into actual sales down the road, he said the pace of activity is unsustainable.

"In fact, with a weakening economy, worsening labour market situation, higher borrowing costs and tighter lending conditions, potential U.S. home buyers have their backs up against the wall, and we expect this to be reflected in further weakness in housing market activity going forward," he said.

The consensus was expecting a 1.3% decline in the month. The index now stands at 93.4, up from the previous month's 87.0 reading.

Regionally, results were all positive in the month, but it was the West that created the rebound. Pending sales in the West saw a whopping 18.4% advance in August following an 8.4% decrease in July, while sales in the Northeast posted an 8.4% increase following a 7.5% loss in July. In addition, pending sales in the Midwest rose 3.6% after a 2.8% advance in July, and sales in the South were up 2.3% after a marginal 0.1% increase in July.

"What we're seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region," said NAR chief economist Lawrence Yun.

The NAR projects the 30-year fixed-rate mortgage rate to average 6.1% in Q4 and then trend up gradually to 6.6% by the end of 2009. The NAR also said the housing affordability index is likely to average 18 percentage points higher in 2008 than in 2007.

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.

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