The Pending Home Sales Index (PHSI) is an index created by the National Association of Realtors (“NAR”) to measure housing contract activity, which is released the first week of each month. PHSI analyzes the relationship between existing home sale contracts and transaction closings over the last four years. As of September 2009, contract activity for pending home sales had risen for the sixth straight month, a pattern not seen since the Index began in 2001.
Why are we seeing so many contracts signed in recent months? Certainly, the lower home prices and falling cost of mortgages have played a role. However, real estate pundits are attributing a material part of the increase to the one-time $8,000 tax credit, which is set to expire at the end of November. The NAR estimates that at least 350,000 of the 1.8 million first-time purchased a home solely because of this tax credit. Though Washington is expected to extend this credit, many first-time home buyers are not gambling on the extension. Rather, they have chosen to play it safe and take the credit now, thus scrambling to close home purchases before the November 30, 2009 cut-off date.
The incentive to purchase homes spurred by the tax credit may be partially responsible for the positive news in the real estate residential front. Spending on private home construction jumped 2.3% in July to an annual rate of $245.6 billion — the highest level since April. Public spending on residential homes also rose 3.6% to an annual rate of $8.6 billion — a record number! While commercial construction is still weak, and expected to remain sluggish as it is a 12-month trailing indicator behind residential building and consumption, the focus ought to be on both private and public spending in the residential market.
Hopefully, an extension of the one-time tax credit will continue to drive, even if in small measure, new home buyers to purchase homes. If and when residential construction reaches a critical mass, commercial building will, eventually, increase as well. We can only hope that Washington sees the connection. We will keep you posted.
Tisha Black-Chernine, Esq.