Smith Faculty Opinion Article	October 3, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Pending Home Sales Index Declines
Housing Prices Likely to Continue Falling

The National Association of Realtors reported today that its Index of Pending Homes Sales Index was down 14.1 percent in August from a year earlier. The August index was up 4.3 percent from July and down 3 percent from May and June.

Through next winter, home sales are likely to continue weak, home prices are likely to continuing falling, and the number of unsold homes is likely to be high. Clearly, the housing market is burdened by a glut of sellers and shortage of buyers.

Last week, the NAR reported August existing home sales were down 12.6 percent from a year earlier, average prices had fallen 1.5 percent, and inventories of unsold homes had soared to 7.5 months supply, up from 4.7 percent. Things are likely to get worse before they get better.

The Pending Homes Sales Index is based on home sales contracts offered by buyers and accepted by sellers from a sample of over 100 multiple listing services and over 60 large brokers throughout the United States. Since 80 percent of new contracts typically result in final sales within two months, this index indicates where the housing market is going.

NAR existing home sales and price data report final transactions contracts consummated and houses actually sold. Each month much is made of the existing home sales and prices, but these data only tell us where we have been.

Today's pending homes sales data indicate a lot about where the housing market is headed, and it appears the housing market will remain soft at least until next spring. If the inventory of unsold homes declines, it will likely indicate frustrated buyers are removing their homes from the market.

Much latent supply, the unlisted homes of would be sellers, is likely pilling up. In fact, the inventory of unsold homes is likely much higher than the 7.5 months supply reported by the National Association of Realtors. Frustrated home owners, under no pressure to sell to relocate for new jobs or retirement, are likely holding houses off the market and waiting for conditions to improve. Those would be sellers may have to wait until 2008 or 2009 to see a robust market again.

Over the last five years, housing values have risen more than 50 percent nationally, outpacing the paychecks of buyers. The housing market is ripe for an adjustment a year or two of flat or falling prices followed by a period of only modest price gains appears likely.

A modest adjustment in the housing market is good news for the economy and the stock market. Even with modest price adjustments, households will still have enjoyed considerable increases in their wealth, and the long run outlook for consumer spending remains good.

In recent years, Americans have been over investing in housing, households have not saved enough in financial assets, and businesses have underinvested in the assets necessary to fuel enduring, healthy economic growth. Following historic patterns, households will save more and invest more in the stock market, and businesses will be more inclined to spend more on plant, equipment, R&D, technology, and supply chain improvements.

Over the next year, stock prices should benefit from an adjustment in the housing market.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.