Despite an unchanged reading in U.S. pending home sales in January, the consensus forecast is looking for a 1.0% month-over-month decline in the National Association of Realtors' February release on Tuesday. However, economists are far from unanimous in their calls.
"Several forces appear to be moving in opposite directions for this indicator," explained Michael Feroli of JPMorgan Chase. "On the downside, new home sales fell 1.8%m/m in February and mortgage purchase applications declined 9.4%. However, pending home sales tend to lag movements in contract mortgage rates by one- to three-months and in the period leading up to February mortgage interest rates had been declining."
"Moreover, the Michigan sentiment measure of home-buying conditions improved dramatically in February," he added.
According to a report from Capital Economics, "What happens to sales now will depend on conforming mortgage rates which, as we saw in Chart 3, spiked in February before falling back more recently, and home prices, which are plummeting nearly everywhere now."
While economists tend to agree on the history of mortgage rates and their high correlation with pending home sales, economists at Lehman Brother pointed out that closed, not open mortgage rates, will determine Tuesday's figure. "We expect pending home sales to have fallen 1.5% in February after holding steady in January. Pending home sales track signed, not closed, contracts, which causes the index to be influenced by mortgage rates. The average rate on a 30-year conforming mortgage rose sharply in February, which could discourage new demand," reads an excerpt from a research note.
"In addition, buyers are hesitant amid expectations of continued price declines and uncertainty about the economic outlook," it added.
Pending home sales are an important tool used in forecasting existing home sales, which are scheduled for release on April 22.
By Erik Kevin Franco and edited by Nancy Girgis