Pent-up Demand and Record Low Interest Rates Give Pending Home Sales a Boost

Pending home sales jumped 10.4% in October compared to September, according to the National Association of Realtors, with the Midwest accounting for the biggest gains, with pending sales climbing 24% in just one month.

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The Northeast and the South also saw sizable gains, while buyers in the West remained on the sidelines, with month-to-month pending home sales basically flat in November.

“Home sales have been plodding along at a sub-par level while interest rates are hovering at record lows, and there is a pent-up demand from buyers who normally would have entered the market in recent years,” said NAR chief economist Lawrence Yun. “We hope this [indicates] more buyers are taking advantage of the excellent affordability conditions.”

However, the NAR cautions that not all pending contracts will become actual closed home sales. Cancellations have been running high of late, with 18% of realtors reporting at least one cancelled contract in September, a huge jump from the normal level of between 4% and 6%.

The reasons for the cancellations range from potential buyers not qualifying for a loan or not getting the interest rate they need, to buyers pulling out of short sales, in which a borrower sells for less than the value of the mortgage, as they require a long and difficult process that includes getting bank approval.

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The fact that home prices in the U.S. continue to decline, as seen in Tuesday’s report from S&P/Case Shiller, also has a tendency to scuttle a deal before its completion. In fact, any negative economic news — including that related to the European financial crisis — can give potential buyers cold feet.