The extraordinary 12.2 percent drop in pending home sales from June to July did not get as much attention as it deserved. While all the usual cautions about making too much of a single month's data should apply, this is an extraordinary drop and there is an obvious culprit: the tightening of mortgage credit. Just to remind everyone, the pending home series from the National Association of Realtors tracks the number of sales contracted in a month. If contracts are not signed, houses don't get sold. So the July index is giving us an advanced indicator of how many homes we should expect to see sold in August and September. Of course not every contract results in a sale. This is especially likely to be the case now, with mortgage credit having tightened abruptly in the last two months. A much higher percentage of the contracts that were signed in July are likely to fall through than would typically be the case. In other words, the July pending sales data imply an even sharper decline than the 12.2 percent figure reported. This is big news. [Addendum: A survey of mortgage brokers found that one-third of loans originated by mortgage brokers failed to close in August (this is presumably of loans scheduled to close in August). By comparison, only four percent of loans failed to close three years ago.]
--Dean Baker
