Economy Watch: Pending Home Sales Rise

By Dees Stribling, Contributing Editor

Consumers and investors are supposed to be nervous during this dry summer of 2012, but homebuyers seem determined to go ahead with their plans to buy—more of them than previously, at least. According to the National Association of Realtors on Wednesday, its Pending Home Sales Index, which is based on contract signings, rose 5.9 percent to 101.1 in May from 95.5 in April. The reading is also 13.3 percent higher than in May 2011.

By NAR’s reckoning, an index of 100 is equal to the average level of contract activity during 2001, which was the first year for the index, as well as the first of five consecutive record years for existing-home sales. The organization says that 100 coincides with a level that’s historically healthy.

The persistent rise in the Pending Home Sales Index caused the ever-optimistic NAR chief economist Lawrence Yun to muse in a press statement that “if housing starts do not rise in a meaningful way over the next two years due to the difficulty in getting construction loans, and barring an unexpected shift in the economy, [it] could lead to shortages where home prices could get bid up close to 10 percent in 2013.”

Could housing prices increase that much that fast? In most MSAs, according to Tuesday’s Case-Shiller indices, the movement is already trending in the right direction for an increase, just not that fast. In April 2012 (the latest month gauged by Case-Shiller), 17 metro areas experienced month-over-month home price increases, while 10 cities had year-over-year price increases.

It’s been a long time since there was that much upward movement in residential prices, except for during the short artificial stimulus of the homebuyer tax credit. Most markets started seeing month-over-month and then year-over-year declines in the mid-2000s, and have made no meaningful recovery since (Case-Shiller, like the Pending Home Sales Index, coincidentally goes back to 2001.)

Durable goods orders up, Midwest manufacturing down

The Census Bureau reported a bit of unexpected good news on Wednesday: U.S. durable goods orders were up 1.1 percent in May, compared with a revised drop of 0.2 percent in April. Factoring out transportation-related durable goods, such as planes, trains and automobiles, and the monthly increase was 0.4 percent in May compared with a decline of 0.6 percent in April.

Separately, the Chicago Fed said on Wednesday that Midwest manufacturing output decreased 1 percent in May, with the Chicago Fed Midwest Manufacturing Index (CFMMI) coming in at 93.4 (the just-before-the-deluge year 2007 = 100). The CFMMI is a composite index of 15 manufacturing industries that uses hours worked data to measure monthly changes in regional activity, according to the Fed.

Wall Street was more optimistic than not on Wednesday, with the Dow Jones Industrial Average up 92.34 points, or 0.74 percent. The S&P 500 gained 0.9 percent and the Nasdaq advanced 0.74 percent.