Housing Still a Drag

The focus is on pending home sales today. Economists were looking for a positive report from the National Association of Realtors, following upbeat news from the manufacturing sector and some positive earnings reports starting the week.

The news for December could have been better; in fact, the report was lukewarm. Although December contracts increased 1 percent (seasonally adjusted) from November, the month of November saw the end of the tax credit surge in 2009, showing a dip of 16.4 percent from previous months. On a brighter note, sales are still about 11 percent higher than last year. But is it enough?

It looks like the inchworm is back in housing activity, at least temporarily. The market appears to have sopped up a large portion of first-time homebuyers in October of 2009, and even with tax credits extended to existing homeowners, the housing market isn’t getting enough churn — after all, existing homeowners have to sell first.

Unless housing swings to the upside in January, the housing sector will continue to be a drag on the economy going forward. Economists point to diminishing inventories and stabilizing prices as positives for housing activity going into the new year. But with the tax credit set to expire April 30, 2010, the news isn’t good enough. The market, however, took the news as a positive and stocks rose after the report.

The Midwest had the greatest increase in pending home sales of about 5 percent over November 2009, beating December 2008 by 8.7 percent. Existing home sales in the West fell about 4 percent in December, but still 18.6 percent better than December 2008.

The pending home sales index measures existing home sales that are under contract. A contract generally closes in four to six weeks to complete the sale. An index of 100, which formed the baseline for the first year of the report, is equal to the average level of contract activity during 2001.