Pending Home Sales Surge, Mortgage Purchases UP Despite Interest Rate Rise

This week housing’s biggest story was a big rise in pending home sales. In addition we’ll cover rising interest rates and mortgage purchase applications. Standard & Poor’s also reports on the broad-based home prices and we’ll finish up with final thoughts and a look forward.

Pending Home Sales: A Big RISE

Coming off slightly lower numbers in existing home sales, the National Association of Realtors reported a 10.4% rise in pending home sales (October over September). While this number is 20.5% lower than last year, a tax credit did not exist during the same period this year. The increase was lead by the Midwest seeing a 27.3% increase in pending home sales over September. The Northeast also saw a large increase of 19.6%, followed by the South at 7.1%, and slight decline of 0.4% in the West.

The increase in pending home sales is a direct reflection of the increase in mortgage purchase applications over the last 8 weeks. Pending home sales are a forward looking indicator, leading me to believe the last couple months of existing home sales for 2010 could surprise to the upside. People are getting more confident about the economy and are reacting accordingly. With confidence comes household formation.

Mortgage Rates Rise Slightly

Interest rates continued their upward trend over the last week, with Freddie Mac reporting the 30-year fixed rate rising from 4.41% to 4.46%. The 15-year fixed rate increased from 3.77% to 3.81%. Rates are rising in response to data suggesting the economy is growing faster than many analysts have anticipated. Rates still remain much lower than a year ago when the 15 and 30 year rates were at 4.27% and 4.71% respectively.

News is coming from more sectors of the economy, including the real estate market (finally) solidifying that recovery is taking hold. This reversal in rates over the last few weeks will continue if we if strong retail number prevail over the holiday season. Early indicators show people are spending slightly more than last year.

Mortgage Purchase Activity Outpaces 2009

Refinance activity responded directly to rising rates leading the Market Composite Index to show a 16.5% decline in mortgage activity as reported by the Mortgage Bankers Association. Refinances lead the decline with a 21.5% decrease in applications over the previous week. Bucking the response to higher interest rates, the Purchase Index was up 1.1% over the prior week and was 2.7% higher than a year ago. The 4-week moving average is now up 3.8% for purchases.

Despite higher rates, people are feeling better about the economy leading them to buy despite rates. This goes back to the theory that just cutting rates doesn’t overpower consumer confidence. This is boost in activity, the highest since May (for a week in November), sends a strong signal that home sales are about to rise. The higher rates have may signaled the end of the refinance boom, but I’d rather us see increases in purchase activity.

S & P: Broad-based Decline in US Home Prices

Standard & Poor’s released its quarterly compilation of home prices for Q3 showing a 2.0% decline over Q2. Nationally, prices are 1.5% lower than where they were a year earlier. Within S&P’s 20-City Composite, only 5 MSA’s showed year-over-year price increases those were; Boston, San Francisco, DC, LA, and San Diego.

This decline represents the 2^nd dip in home prices and while expected it isn’t good for those hanging on to underwater mortgages. People in negative equity positions have a better chance of staying current when they see prices rising or real estate market conditions improving. I expect 4^th quarter numbers will show continued broad-based declines. Q1 numbers which won’t be reported until May 2011, will likely show prices are stabilizing.

Final Thoughts and Look Ahead

The big story was the increase in pending home sales. We’re seeing time heal the wounds of the housing crisis primarily due to better economic news. This increase wasn’t spurred by the interest rates alone, nor was it from further tax-credits and subsidies. Lending guidelines remain constricted so my conclusion is we’re simply seeing a more confident population. This is great news for the housing market and when home prices start rising again the recovery will accelerate. That of course will be determined by the inventory overhang. This will be a chicken-egg syndrome for the next 12 months. Beyond that I’m bullish on housing recovering. If home prices recover, that’s good news for investors. If prices stay stagnant and Americans continue to shun home ownership, then investors will win on the yield side due to higher rents.

Photo: dreamlifenewyork

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.