Unforeseen positive news for the battered U.S. housing market- pending new home sales rose 7.4% from July to August.
On Wednesday the seasonally adjusted index of pending new home sales rose to 93.4 from an upwardly revised July reading of 87. The reading was the highest since June 2007, said The National Association of Realtors.
A pending home sale is when the seller has accepted an offer, but the deal has not yet closed. Usually there is a one to two month wait before a sale is completed.
Wall Street economists had predicted the index would fall to 84.9.
The index sunk to a record low of 83 in March and stood at 85.8 in August 2007.
Lawrence Yun, a chief economist for Thomson/IFR, said sales are picking up in places that have seen the most severe declines in housing prices like California, Florida Nevada and Arizona, plus Rhode Island and the Washington, D.C. area. Still, Yun does not expect home prices to rebound until next year and only expects a modest gain of 2 to 3 percent in 2009.
It is still a mystery how the worldwide financial crisis and economic slump will affect the housing market.
Lenders have kept tight reins on mortgage lending, and average rates on 30-year mortgages have remained over 6% for most of the year, despite numerous efforts by the Federal Reserve to encourage banks to lend more.
The latest effort by the central bank came Wednesday, when the Fed and six other major central banks around the world cut interest rates in an attempt to prevent a mushrooming financial crisis from becoming a global economic meltdown.
The Fed reduced a key rate from 2% to 1.5%. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 % and the European Central Bank sliced its rate by half a point to 3.75%. Also cutting rates were the central banks of China, Canada, Sweden, and Switzerland.
However there's no guarantee that that mortgage rates will match the Fed's cut. This is because long-term interest rates, which influence 30-year mortgages, don't always move in sync with the Fed's action, which lowered the interest rate banks charge each other on overnight loans.
The Fed action will reduce borrowing costs almost immediately whose home equity and other floating-rate loans are tied to the prime interest rate, for U.S. bank customers Banks like Bank of America, Wells Fargo and others cut their prime rate by half a point to 4.5 % after the Fed announcement.
Contributed by MLR Realty
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