Market Overview

Pending Home Sales Decline, Surprises to the Downside

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The Pending Home Sales index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 5.5 percent to 95.5 in April from a downwardly revised 101.1 in March but is 14.4 percent above April 2011 when it was 83.5, according to the National Association of Realtors. This was worse than the 0.0 percent analysts were expecting.

Lawrence Yun, NAR chief economist, said a one-month setback in light of many months of gains does not change the fundamentally improving housing market conditions. “Home contract activity has been above year-ago levels now for 12 consecutive months. The housing recovery momentum continues," he said.

Yun notes home sales are staying well above the levels seen from 2008 through 2011. "Housing market activity has clearly broken out at notably higher levels and is on track to see the best performance since 2007," he said. "All of the major housing market indicators are expected to trend gradually up, but a new federal budget must be passed before the end of the year for the economy to continue to move forward."

An increase in pending home sales implies a healthy housing market. According to the multiplier effect, housing has an impact on the rest of the economy. Increases in homes sold suggest increased household income and in turn an economic expansion, and visa versa.


ACTION ITEMS:

Bullish:
Traders who believe that a beat in Pending Home Sales is positive for the economy, you might want to consider the following trades:
  • If numbers come in better than expected, long building companies like PulteGroup (NYSE: PHM).
  • Also, long companies like Louisiana-Pacific (NYSE: LPX), who manufacture and distribute products and materials for home construction.
Bearish:
Traders who do not believe that the Survey is a leading indicator for the general housing market, you may consider alternative positions:
  • If the number comes in better than expected, take advantage of strength and short building companies like DR Horton (NYSE: DHI).
  • Also, short do-it-yourself stores like Lowes (NYSE: LOW) or Home Depot (NYSE: HD) because if home sales increases, it mean consumers are not likely to fix-up their existing house.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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