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US pending home sales rise for third straight month; loan demand increases

FILE PHOTO: Homes for sale in Washington

By Lucia Mutikani

WASHINGTON (Reuters) - Contracts to buy U.S. previously owned homes increased for a third straight month in February, raising cautious optimism that the housing market slump could be bottoming out.

The National Association of Realtors (NAR) said on Wednesday its Pending Home Sales Index, based on signed contracts, rose 0.8% last month to the highest level since August. Contracts jumped 6.5% in the Northeast. They also edged higher in the Midwest and South, but dropped 2.4% in the West.

Economists polled by Reuters had forecast contracts, which become sales after a month or two, would fall 2.3%. The surprise increase occurred despite a rise in mortgage rates from early February through early March, according to data from mortgage finance agency Freddie Mac. Before the recent rise, mortgage rates had mostly been on the decline since November.

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Mortgage rates have since been trending lower as the collapse of two U.S. regional banks sparked fears of contagion in the banking sector, pushing down U.S. Treasury yields.

"These data are potentially signaling some stabilization in home sales at lower levels," said Rubeela Farooqi, chief U.S economist at High Frequency Economics in White Plains, New York.

Pending home sales decreased 21.1% in February on a year-on-year basis. Data this month showed sales of previously owned homes rebounded for the first time in a year in February, while new home sales notched their third straight monthly increase.

(Graphic: Graphic-Pending home sales - https://www.reuters.com/graphics/USA-STOCKS/lgpdkjbxlvo/phs.png)

Homebuilder sentiment is recovering, though it remains at depressed levels. Single-family housing starts and building permits also rose in February.

The housing market has been squeezed by the aggressive interest rate hikes delivered by the Federal Reserve in its battle to tame high inflation, with residential investment contracting for seven straight quarters, the longest such streak since the collapse of the housing bubble triggered by the 2007-2009 Great Recession.

The Fed last week raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs in a nod to the financial market turmoil. The U.S. central bank has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.

A separate report from the Mortgage Bankers Association on Wednesday showed applications for loans to buy a home increased 2% last week, rising for the fourth week in a row. Home loan applications were, however, 35% lower compared to the same period a year ago.

The weekly increase coincided with a drop in the average contract rate for a 30-year fixed-rate mortgage, the most popular home loan, to a six-week low of 6.45%, MBA said.

(Graphic: Graphic-MBA - https://www.reuters.com/graphics/USA-STOCKS/byprlmaxjpe/mba.png)

Housing affordability is also improving, with annual house price growth slowing significantly in recent months.

The housing market outlook is, however, uncertain because the financial market stress has caused banks to tighten lending standards, which could make it harder for prospective homebuyers to borrow. Supply also remains tight, which some economists say could prevent an outright decline in house prices.

(Reporting by Lucia Mutikani; Editing by Paul Simao)