Another great report for the housing market today. 

Today’s release was the Pending Home Sales Index.  It shows a 2% jump in December according to the National Association of REALTORS®. A “pending home sale” is an existing home under contract to sell, but not yet closed.

This is now five out of six months with an increase and it puts us at the highest levels since the expiration of the first time home buyer tax credit in April.

Combine this data with December’s Existing Homes Sales report (+12%) and New Home Sales report (+17%), this is a recovery for housing.   In a closely related figure, consumer confidence is at an 8-month high.

As always, there are variances by region.  In this case, big variances.  We’re seeing a slowdown in the West, significant and continued growth in the South.  Here is the data:

• Northeast Region: +1.8%
• Midwest Region : +8.0%
• South Region : +11.5%
• West Region : -13.2%

Home buyers should keep an eye on these reports.  They offer insight about what spring should be like. We know that 80% of the pending sales will close within 60 days.  With a reasonable level of confidence, we can assert that home sales in February and March will be higher.  Since home supply is dipping, the battle between supply and demand is starting to shift to the advantage of the seller.  That presses home prices up.

And then the bad part…it’s also tied to the economy.  Mortgage rates get their direction, in a large part, from the overall economy.  As mortgage rates move higher, home affordability goes lower.  Coupled with rising home demand, your dollar won’t buy as much in the second half of 2011 if these trends hold true.

New Home Sales skyrocketed in December, posting a 17.5 percent gain over November.

According to the Department of Housing and Urban Development, New Home Sales climbed to 329,000 in December, besting November by close to 50,000 units on a seasonally-adjusted annual basis.

That’s an 8-month high for New Home Sales and the latest piece of news to indicate that housing is improving.   Perhaps more important, December’s Existing Home Sales (up 12%) and Building Permits (up 6%) also posted gains.   This is not just a spike in New Home Sales due to builder discounts, this rally is currently extending across all three of the big indicators.

We’re also seeing an interesting shift in housing price points.  The early part of this rally was fueled by first time home buyers and many lower-priced homes.  We’re seeing the “move-up” buyer prices of $200,000-500,000 show growth and home sales in that sub-$200k range are slowing down.   December’s New Home Sales data breaks down by price point as follows:

• Homes under $200,000 : 36% of the market (-9% from November)
• Homes between $200,000-$299,999 : 32% of the market (+7% from November)
• Homes between $300,000-$499,999 : 27% of the market (+7% from November)

The 2010 housing market finished on a tear, and that momentum is carrying forward into 2011. Expect the spring season to show strongly, putting pressure on home prices to rise.

November’s Pending Home Sales Index from the National Association of REALTORS® shows a 3% gain over October.  A “pending home sale” is a home under contract, but not yet closed.  We’re continuing to recover from the hangover of April 2010′s first time home buyer tax credit expiration. 

The very logical theory presented by every economist and yours truly is that the April expiration helped accelerate sales forward that would have otherwise closed over the summer.  This theory is buoyed by Home Buyer Tax Credits I & II as well as the Cash for Clunkers program.  These stimuli have had the effect of simply getting people to buy sooner, not necessarily getting new people to buy. 

If that is the case, the two spikes in the Pending Homes Sales graph are the expirations of Home Buyer Tax Credits II and III.  Assuming that the 2009 credit and the 2010 credit were both pulling from the traditional “warm month” home purchases, it appears that housing has rebuilt a strong foundation of buyers and has been pretty steady over the past year.

As was to be expected, the surges near the time of the tax credit expirations were dominated by first time purchasers.  These most recent figures have shown strong growth in the repeat, or upgrade, buyer market.  

Home values follow from supply and demand.   We’re seeing buyer traffic and clearly they’re writing contracts.  We’re seeing home supply dwindle lower.   This looks good for home values. 

The only question not yet answered is the “shadow inventory” from all of the old foreclosures.   The theory from the “shadow inventory” folks is that the banks will eventually try and simultaneously sell all of their real estate, thus crushing home values.  If they did flood the market at once, it is logical that home prices would fall. 

The theory from foreclosure tracking firm, RealtyTrac, is that the banks will logically be more strategic and slowly sell their assets so that they don’t undercut their own values on the books.  I tend to side with RealtyTrac.

Barring any massive changes, housing looks as healthy as it has in quite a few years. 

The report, released by the Department of Commerce, shows that sales of new, single-family homes increased to 290,000 in November on an annual basis.  That’s a 6% jump over October and puts the figure right in line with the 6-month average—an average that includes the traditionally “hotter” summer months.

At the current pace of sales, the supply of new homes would be exhausted in just 8.2 months.  That’s down 0.6 months from October.

It’s also right in line with the Existing Home Sales data.  That also showed a 6% improvement and a decline in housing supply.

It’s another step in the right direction and these are “real” purchases.  The hangover from the government’s various first time home buyer tax credits is very visible in May’s plunge. Since then, we’ve seen recovery and the growing home builder confidence report highlights this point.

It isn’t necessarily a big surprise, but the break down by price is interesting:

• Homes under $200,000 : 47 percent of all sales
• Homes between $200,000-$299,999 : 29 percent of all sales
• Homes between $300,000-$399,999 : 14 percent of all sales

Luxury homes accounted for less than 2 percent of sales last month suggesting that builders count first-time and move-up buyers as their core market.

As we move into 2011, housing is looking increasingly solid.  Sales in all categories are improving over the past six months.   Coupled with rising interest rates, it appears that buying a home in early 2011 will be cheaper than waiting until after the snow has melted.

According to the National Association of REALTORS®, a quarter-million more existing homes were sold during the annual period ending in November as compared to October.  An “existing home” is a home that cannot be considered new construction.

This type of growth impacts the home supply.  It dropped by a full month, now meaning that the complete stock of homes for sale will be exhausted in 9.5 months.

November’s strong housing data is yet another signal that the housing market’s foundation has been rebuilt.  Like all real estate data, your market may will vary.

It’s helped that there are great “deals” on which for buyers to pounce.   In November, short sales and foreclosures accounted for one-third of all existing homes sold, and carried an average price discount of 10 percent and 15 percent, respectively, as compared to non-distressed sales.  While conventional financing may not always work for distressed properties, the 203(k) rehab loan can be an incredible opportunity in markets like these.   With average discounts of 10-15%, distressed properties that need minor rehabilitation can be immediate equity-builders.

We’re seeing some changes in who is buying:

• First-time buyers : 32% of all buyers
• Investors : 19% of all buyers
• Repeat buyers : 51% of all buyers

This breakdown suggests that housing has regained its footing.   First time home buyers cannot support a long-term market.  It’s like a football team only having the rookies show up for practice.  You need everybody there.

Compared to a year ago, we’re seeing the veterans come back.  Repeat buyers only represented 37% of buyer traffic one year ago and that’s up to 51% now.  The investor participation remains steady.   While we track consumer sentiment readings when talking about mortgage rates on this blog all the time, perhaps the most important consumer sentiment reading comes when a family upgrades their home.  It’s certainly more economically significant than buying a new dishwasher.   Families don’t need 6% GDP growth to upgrade a home, it follows when they perceive their job as safe and the economics make sense.

We may not be getting a wild and crazy skyrocketing housing market, but it looks like we’re getting the beginnings of a healthier, more sustainable housing market. If you’re looking at buying a home in 2011, please don’t wait until the snow melts.   If the market keeps improving like this, your home affordability will worsen.

Low mortgage rates and low home prices have spurred buyers back into action.  A “pending home sale” is an existing home under contract to sell, but not yet closed.

What is notable right now is that we’re back to our highest levels since April–the deadline for the first time home buyer tax credit.  What’s really notable is that we have buyers buying based on the fundamentals of home affordability as opposed to the carrot of an $8,000 tax credit. 

It also explains why builder confidence continues to rise in spite of the fact that the New Home Sales report was soft.   Builder confidence is heavily weighted on not only sales, but also foot traffic and six month projections.  The builders, the people with skin in the game, see things getting better.

As always, real estate is local.  Regionally speaking, the Midwest saw the biggest pop from September to October.  By region:

• Midwest Region : +27.3%
• Northeast Region: +19.6%
• South Region : +7.1%
• West Region : -0.4%

The Pending Home Sales Index is a reasonably good forecast of the Existing Home Sales figure in November and December.  Roughly 80% of homes under contract close within 60 days according to the National Association of Realtors.

Put simply, the housing market is heating up.   Similar to April when Realtors were complaining about a shortage of well-conditioned, well-maintained homes, we’re seeing it again.  A shortage of desireable homes significantly reduces buyer leverage in negotiations. 

When is this a problem?  When you’re shopping when other buyers are as well.  A great example is spring.  There is nothing that reduces negotiating power than multiple offers, so why would you want to shop when other people are?

Roses in July are less expensive than roses in February.  It’s simple supply and demand.  Same deal with homes.

Talk to your real estate agent now if you’re thinking about buying in 2011.  The smartest move might be to buy before another offer starts driving up the price on your dream home. 

Mortgage rates squeezed out narrow improvements last week.  After a mortgage rate rally during the Monday, Tuesday and Wednesday trading sessions, a sell-off on Thursday and Friday erased the gains.

At the close of the week, conforming and FHA rates had improved slightly.

The economic news was fairly limited last week.  The main driver in mortgage rates was the currency market.

Mortgage rates are very closely tied to the U.S. dollar.  Since mortgage bonds are repaid in U.S. dollars, the value of the dollar directly influences how attractive these mortgage backed bonds are to investors.

More demand for bonds raises prices which, in turn, lowers rates.  Bond prices and bond yields move in opposite directions and this explains the pattern of rates last week.  Monday-Wednesday, the dollar was stronger.  Moving through Thursday and Friday in advance of the G-20 meeting, the dollar sold-off, thus pushing rates higher.

This Week’s Interest Rate Predictions

We should return to a data-driven week.  There is substantial reporting on housing and housing is a key part of the ongoing economic recovery.

Here’s what is on tap:

• Monday : Existing Home Sales
• Tuesday : Case-Shiller Index, Consumer Confidence, Home Price Index
• Wednesday : New Home Sales
• Thursday : Initial and Continuing Jobless Claims

Mortgage rates are still near the all-time lows and it is highly unclear as to whether they’ll stay this low or start rising.   Once they do reverse higher, it’s unlikely that they’ll fall back down.

Existing Home Sales rebounded and the data sort of makes sense.

In new homes, the current pace of sales would deplete the inventory in 8.6 months.  So, while there are less buyers of new homes, there are also less new homes coming on the market and we’ve been forecasting this all year.

For example:

1. Building Permits dropped between March and June
2. Housing Starts dropped between April and July
3. Homebuilder confidence continues to sag

If you line this data up, it forecasts lower numbers of new homes, thus the lower number of new homes being sold.

This could be a great time to look at new construction.  With the colder months near, builders are motivated to turn over inventory.  That, in turn, helps drive prices lower.

Aside from builder incentives and the naturally stronger negotiating position for today’s buyer, the fact that mortgage rates are down 0.75% since the beginning of the year.   Homes were already more affordable just with the dip in prices, but coupled with mortgage rates we’re now we’re nearly off the chart.

Builder pessimism may be incorrect.  They are in a position to soon run very low on inventory and build at today’s less expensive costs.   It might be the right time to take advantage of that pessimism, by spring it is unlikely that home affordability will any more attractive.