Pending Home Sales Jump Amid Highest Mortgage Risk Since 2008

The National Association of Realtors reported contracts to buy previously-owned homes jumped 3.1 percent in February, beating Wall Street’s 0.4 percent forecast. However, inventory remains a problem, while greater concerns mount over whether or not increased artificial risk is injecting poor mortgage contracts into a fragile market.

“Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” Lawrence Yun, NAR chief economist said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

The PHSI in the Northeast fell 2.3 percent to 81.7 in February, but is 4.1 percent above a year ago. In the Midwest the index leaped 11.6 percent to 110.4 in February, and is now 13.8 percent above February 2014.

Pending home sales in the South decreased 1.4 percent to an index of 120.2 in February, but is still 10.8 percent above last February. The index in the West climbed 6.6 percent in February to 102.1 (highest since June 2013 at 111.4) and is now 18.3 percent above a year ago.

Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4 percent from 2014. The national median existing-home price for all of this year is expected to increase around 5.6 percent. In 2014, existing-home sales declined 2.9 percent and prices rose 5.7 percent.

“Several markets remain highly-competitive due to supply pressures, and Realtors® are reporting severe shortages of move-in ready and available properties in lower price ranges,” adds Yun. “The return of first-time buyers this year will depend on how quickly inventory shows up in the market.”

However, despite the housing lobby’s (NAR) increased optimism, other factors and changes in lending practices give experts reason for pause.

As PPD reported last week ahead of the NAR report, the composite National Mortgage Risk Index (NMRI) for Agency purchase loans, a gauge of housing market risk, hit a new series high for the 3rd straight month. The NMRI stood at 11.93 percent in the month of February, up 0.1 percentage point from the average for the prior 3 months and 0.8 percent from a year earlier.

Within the composite, the risk indices for Fannie/Freddie, the FHA, and the VA all hit series highs in February, also marking the 3rd consecutive month the subindexes have shattered their previous highs. According to analysts, the marked shift in market share from large banks to nonbanks accounts for much of the sector’s upward risk trend, as non-bank lending is substantially riskier than the large bank business it replacing due to looser lending practices in the name of redistribution.

“The migration of mortgage lending away from large banks is an important story,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “Lightly regulated nonbank lenders have been more than willing to make risky loans, with taxpayers ultimately on the hook if defaults mount.”

But these are risky tactics supported by the Mr. Yun and the NAR. Further, while the Pending Home Sales Index is a leading indicator for the housing sector, it is based on pending sales of existing homes representing roughly 20 percent of transactions for existing-home sales. The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.

“Our data confirm the push by regulators to loosen lending standards is heavily reliant on layering of, not compensating for, risks,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “This is true for both low downpayment and high debt-to-income lending.”