Rise in signed contracts gives housing market lift

December 30th, 2010 @ 11:33am

By JANNA HERRON
AP Real Estate Writer

NEW YORK (AP) - People are starting to buy homes again, lifting a battered industry that is bracing for its worst sales year in more than a decade.

Signed contracts to purchase homes rose in November, the fourth increase in five months. That should give the housing market a boost in the first few months of the new year because there's usually a one- to two-month lag between a sales contract and a completed deal.

Economists cautioned that a major reason for the jump is that people are buying foreclosed homes, which sell at steep discounts and weigh on the broader market. Another obstacle is the sudden spike in the 30-year fixed mortgage rate, which only weeks ago had fallen a 40-year low.

Still many economists expect sales to gradually rise next year as the economy adds more jobs and home prices stabilize.

"Sales appear to be picking up and we expect better sales in the next several months," said Patrick Newport, a housing economist at IHS Global Insight. "A lot of that is because the job market is improving."

The National Association of Realtors said Thursday its index of sales agreements for previously occupied homes increased 3.5 percent last month from a downwardly revised reading in October. Contract signings were up in the West and Northeast, but down in the South and Midwest.

A reading of 100 indicates the average level of sales activity in 2001, when the index started. It was above that level during the boom years, sank during the recession and surged temporarily when the government offered tax incentives to spur sales. When the credits expired in April, the index sank again.

Completed home sales _ which the Realtors group measures in a separate report _ are expected to total about 4.8 million units this year. That's much lower than the 6 million units that analysts consider a healthy pace. The last time sales were lower was 13 years ago when sales totaled 4.4 million units.

A third of the pending sales likely will be foreclosures or short sales, where a homeowner sells a house for less than what is owed on it, NAR spokesman Walter Molony said. That tracks with the average for the year. These distressed sales go for discounts of up to 50 percent in some of the hardest-hit areas and will continue to weigh down home prices.

Many economists expect home prices to drop another 5 percent to 10 percent in the next six months before stabilizing. Prices fell in 20 of America's largest cities in October, according to the Standard & Poor's/Case-Shiller home price index released Tuesday.

There are several challenges facing the housing market aside from foreclosures. Potential buyers are worried about their jobs or are unable to qualify for a mortgage because lenders have tightened standards. And now mortgage rates are on the rise, gaining about two-thirds of a percentage point in the last month.

This week, the average rate on 30-year home loans rose to 4.86 percent from 4.81 percent, mortgage giant Freddie Mac said Thursday. That's the highest level in seven months. It hit its lowest level in 40 years in November at 4.17 percent.

The average rate on the 15-year loan rose to 4.20 percent from 4.15 percent _ the highest reading in six months. It fell to 3.57 percent in November, the lowest level on records starting in 1991.

Rates overall have been rising since November as investors shift money out of Treasurys and into stocks. Many expect the tax-cut plan will fuel economic growth and increase inflation. Yields tend to rise on fears of inflation. Mortgage rates track the yields on the 10-year Treasury note.

The report on contract signings from the Realtors showed that signings jumped 18.2 percent in the West and edged up 1.8 percent in the Northeast. The Midwest region saw a 4.2 percent drop in signings in October and the South posted a 1.8-percent dip.