With U.S. housing affordability at a record high in December, a better-than-expected rise in pending home sales showed signs homebuyers are returning to the market.

December's pending home sales grew by 6.3%, against expectations of a flat reading. The report from the National Association of Realtors (NAR) records home sales that are signed but not finalized, predicting existing home sales for the months ahead.

"This is an encouraging report as it suggests that a potential bottom in the housing market is materializing," said Ian Pollick, an economist at TD Securities.

Nevertheless, Pollick said there remains a "tremendous" amount of supply on the housing market. To make matters worse, the Federal Reserve's quarterly Senior Loan Officer Survey released yesterday revealed that banks are still tightening the conditions under which they'll issue mortgages.

"You have to start somewhere," said Ian Shepherdson, an economist at High Frequency Economics, referring to the increase. He attributed today's rise to attractive bargain basement prices on foreclosed homes.

Indeed, the report from NAR showed the affordability index hit 158.8 - its highest level on record.

The sale of heavily discounted homes is "hardly the sign of a robust market," said Paul Dales, an economist at Capital Economics.

However, one economist disagreed that the foreclosure argument paints the whole picture.

Michelle Meyer, an economist at Barclays said, "the balance in home sale was concentrated in the Midwest and in the South, and those areas, while they do have notable presence of foreclosures, it's not as high as what you've seen in the West," she said.

While this is a positive sign, Meyer said she doesn't foresee a bottom in housing activity before mid-year, and added home prices still have a long way to fall.

Dales agreed, and said with so much inventory left to be sold, U.S. home prices will fall by another 10% or so.

By Megan Ainscow and edited by Sarah Sussman
©CEP News Ltd. 2009