The US housing market will have another strong month of sales in May according to the pending home sales index, which is a leading indicator for home sales. The index rose by 6.0%, higher than forecasts of a 5% increase, as home buyers took advantage of the expiring home-buyer tax credit and low mortgage rates.

The pending home sales index measures the number of of contracts signed to buy a home even though the transaction has not been closed. The sale is usually finalized within one or two months. The tax credit was good for home buyers as long as they signed the contract prior to the end of April and close before the end of June.

From the Release: Lawrence Yun, NAR chief economist, said this second round of surging sales from the tax credit extension looks as strong as the original tax credit. There were concerns that only a small pool of buyers were left to take advantage of the tax credit extension. But evidently the tax stimulus, combined with improved consumer confidence and low mortgage interest rates, are contributing to surging sales, he said. The housing market has to get back on its own feet and now appears to be in a good position to return to sustainable levels even without government stimulus, provided the economy continues to add jobs. NAR expects a net of 1 million additional jobs in the second half of this year and about 2 million in 2011.

For the month of April new home sales rose to an annualized pace of 504K, the best figure since May 2008, while existing homes sales rose to an annual pace of 5.77M.


Above is a look at new home sales, and the sharp increase the past two months.


And here is a chart of existing home sales, and we can see the second peak forming as we approach the tax credit deadline, much as we had a surge when the tax credit was due to expire in late '09.


Here is a more longer term look at existing home sales, with the green line representing the sales pace. We can see that sales have found a bottom following the recession (in yellow) and we can see here the second surge in sales. From this graph we can also see that the inventory of homes on the market (blue line) is increasing again which is pushing up the inventory to sales ratio (red line).

With the stimulus to the housing market due to run out, we can expect to see a drop off in the sales pace. However the one major factor that can sustain the housing market rebound would be strong job growth. The monthly non-farm payroll report for May comes out this Friday and is forecast to be a strong one with 465K new jobs (though many of those will be Census work). Still, private sector jobs are expected to be strong as well.

Also, the recent surge in home sales will filter down and give a boost to other parts of the economy including business selling furniture, materials for gardening, and those doing remodeling construction work. Therefore, today's better than expected reading will help to buttress GDP growth for the second quarter as well as for the beginning of the third quarter.