The number of houses placed under contract fell sharply in November in the first drop in nearly a year, figures released Tuesday show. It was the clearest sign yet that predictions of another downturn in real estate may become a reality.
The National Association of Realtors said that its index of pending home sales plunged to 96 from a revised level of 114.3 in October. Analysts had predicted a drop, but nothing like that.
“We thought it would drop 2 percent,” said Jennifer Lee of BMO Capital Markets. “When you see 16 percent, the first thing you say is, what the heck happened here?”
Since the majority of pending sales become final in six weeks to two months, the index is considered a reliable indicator of where the market is headed. The index is calculated by comparing the number of pending sales with the level of 2001, when the index was formulated.
The data indicates that the weakest parts of the country are the Northeast and Midwest, both of which fell 26 percent in November from the previous month after adjusting for seasonal variations. The South dropped 15 percent, while the West was off 3 percent.
Ms. Lee called the drop from October to November “unnerving” but said that the index remained well above the level of a year ago. In November 2008, when the financial crisiswas at its peak and buying a home required a faith in the future that many did not feel, the index was 83.1.
As the overall economy improves and the employment situation grows a little less dire, the question becomes whether real estate can muddle through — or if it will need a new round of government support to ward off another damaging downturn.
There are plenty of reasons for worry. The Obama administration’s effort to compel lenders and servicers to modify loans has not been a success. Many of these owners will eventually lose their homes to foreclosure.
Meanwhile, a quarter of homeowners with mortgages owe more than their houses are worth. If prices start dropping again, some will be induced to walk away, further undermining the market.
“I wouldn’t rule out more stimulus, especially in an election year,” said Ivy Zelman, an analyst.
Last year’s stimulus efforts, however expensive and divisive, calmed a market where prices had plummeted by a third. Even now, the government’s efforts to push down interest rates and entice buyers with a tax credit appear to be having an effect, keeping a weak market from getting weaker.
Walter Martin and Paloma Munoz, artists in Dingmans Ferry, Pa., are a stimulus success story. They are paying $360,000 for a new home 10 miles away without even having an offer for their current home.
“The new home has enough space for us both to have studios,” Ms. Munoz said. “The price is amazing, we are getting a mortgage at a 5.125 rate, and we qualify for a $6,500 credit.”
It is a leap of faith, she acknowledged, but an eminently sensible one. “When houses were expensive, everyone wanted to buy, and now that they’re cheap everyone is scared,” she said.
Buyers like Ms. Munoz and Mr. Martin are outnumbered, however, by people who think the market still has room to fall. While some of these may indeed be scared, others simply see a virtue in patience.
“With two growing boys, we are busting out of our small house,” said Stephen Sencer, deputy general counsel at Emory University in Atlanta. “But I’m still waiting for sellers to capitulate.” His agent is telling Mr. Sencer that may happen in the spring.
Starting from a low of 80.4 last January, pending sales rose for nine consecutive months in 2009. The index proved a harbinger of both completed sales, which began climbing in April, and prices, which started rising over the summer.
As the Nov. 30 expiration of the tax credit drew near, would-be buyers hastened to secure deals. Sales in November roared at a 6.54 million annual pace, the highest since February 2007.
At the last minute, Congress extended and broadened the credit. The urgency immediately dissipated. “We were really, really pushing hard, and I think everyone just wore out,” said Steve Havig, president of Lakes Area Realty of Minneapolis.
Buyers now have until April 30 to qualify for the credit. Many analysts say the effect this time around will be mild.
“It could turn out the second credit has such a small impact it doesn’t show up in the data,” said Patrick Newport of IHS Global Insight.
Nevertheless, he predicts the downturn this time will be gentler. “The economy is improving, and that is what the market needs to get back on a sustainable path,” Mr. Newport said.
Long before the tax credit ends, another stimulus effort is due to disappear. The Federal Reserve has bought more than a trillion dollars of mortgage-backed securities in a successful effort to push down mortgage rates. The Fed is scheduled to wind down the program by March 31.
Rates are already moving higher, exceeding 5 percent in some lender surveys. Perhaps as a result, mortgage applications to buy homes in late December were a third lower than during the corresponding period in 2008, the Mortgage Bankers Association said.
The Fed’s Open Market Committee left itself leeway in its December meeting to start buying again, saying it “will continue to evaluate the timing and overall amounts of its purchases of securities.”
Rising rates could hamper Mr. Martin and Ms. Munoz’s search for a buyer for their old house.
“It’s been on the market for almost three months,” she said. “We have had very few viewings.”
