Two leading indicators — applications for purchase mortgages and the number of homebuyers entering into contracts to purchase homes — suggest sales of resale homes hit bottom in July and will rebound this fall, economists at mortgage insurer The PMI Group Inc. conclude.
In their latest monthly Housing and Mortgage Market Review, PMI Chief Economist David Berson and analyst Brett Soares make a case that existing-home sales will show "some modest gains" in August, September and even October.
After hitting a low in the first half of July, purchase mortgage applications have edged up slightly, the report noted, citing statistics gathered by the Mortgage Bankers Association.
Because of the time it takes to approve a loan and close a home sale, loan applications submitted in August might not show up in statistics on existing-home sales until October.
Another leading indicator, which counts the number of homebuyers who have entered into purchase contracts — the National Association of Realtors’ pending sales index — was up 5.2 percent in July.
"This is consistent with the increase in the MBA’s purchase applications, and the two of them together strongly suggest that sales have bottomed out, at least for now," PMI economists said.
A housing market index published by the National Association of Home Builders slid in August, but that’s probably an indication that a rebound in new-home sales will lag sales of existing homes, the report said, with buyers likely to bargain hunt for distressed properties.
"The leading indicators of housing demand suggest that the drop in home sales is probably over and that some modest gains may be in store for the (August through October) period," the report said. "Beyond that, the underlying determinants of housing demand will have to strengthen in order for home sales to rise appreciably."
Those factors include job growth, affordability, demographics and consumer sentiment.
PMI economists think unemployment will surge during the fourth quarter to a 2010 high of 9.8 percent, before gradually falling to an average of 8.7 percent by the fourth quarter of 2011 and 8 percent in 2012.
Fears of a second recession are likely overblown, the report said, although economic growth is unlikely to accelerate until the middle of next year.
Affordability is close to record highs, which should drive housing demand. And although household formation remains below average, it’s been increasing at a stronger pace, the report said.
Consumers remain concerned that large inventories of vacant or distressed homes will continue to put pressure on home prices in the future, making them less willing to make the decision to buy a home today.
With nearly one in four households with mortgages owing more than their home is worth, "a large segment of potential homebuyer demand has been eliminated in this cycle," the report noted.
But faster economic growth in the second half of 2011 "should lead to a pickup in job gains and stronger household formation," Berson and Soares predicted in their report.
Next year should bring "a stronger, but still historically modest, rise in home sales," the report concluded.
In their forecast, Berson and Soares envision sales of existing homes rebounding from a projected 4.96 million this year to 5.5 million in 2011 and 5.67 million in 2012.
New-home sales are expected to total 342,000 this year, 485,000 next year and 590,000 in 2012.
The report suggests next year will be a difficult one for lenders, as the refinancing boom sparked by low rates comes to an end. Refinancings accounted for 69 percent of the $1.99 trillion in mortgages originated in 2009 and 67 percent of what’s expected to be $1.55 trillion in mortgage loans funded this year.
Refinancings will probably account for 43 percent of a projected $1.32 trillion in mortgage lending in 2011, and 35 percent of the $1.43 trillion in lending envisioned in 2012.
PMI expects that purchase loan funding will jump 47 percent in 2011 — which bodes well for the majority of Realtors whose commissions are determined by sales prices.