By Lawrence Yun, NAR Chief Economist

The pending home sales index in March again came in soft, falling 1 percent from the prior month. Many media outlets are reporting this will be about the lowest reading since the creation of the index in 2001. However, a smart observer will note that for all intents and purposes, the index has been moving in the very narrow range from August of last year to this March. This time period reflects the post credit crunch where subprime loan originations have disappeared from the market place.

The Northeast region continues to show good signs of recovery. In March, pending home sales rose 12.5 percent. The West and South regions were essentially unchanged. Only the Midwest region experienced a meaningful decline with a 10.4 percent fall.

Pending sales rose in localities where affordability conditions have measurably improved. For example, Bakersfield and Providence both showed outright year-over-year gains in March.

As to the actual closings, the first quarter existing home sales finished with a 4.95 million annualized unit sales pace, which was essentially unchanged from 5.00 million in the fourth quarter of last year. Home sales will continue to trend soft in the current quarter with an expectation of 5.01 million. In the second half, there will be a measurable lift to the 5.6 to 5.9 million range.

There are several reasons for the lift. Mortgages will become more widely available. Both Fannie Mae and Freddie Mac recently announced plans to further provide liquidity, including in the new higher conforming jumbo markets. California, where jumbo loans had accounted for close to half of sales in 2005, were witnessing only 10 to 15 percent of loans originations as being jumbo loans in early 2008. Any reversal in the jumbo loan market share will have a huge impact in markets like California. Legislation is also being debated to make the higher conforming loan limit (now at $729,000 versus $417,000 a year ago) permanent rather than temporary as it is today. The temporary status has not drawn investor interest in holding on to GSE backed jumbo loans and hence the interest rates on jumbo loans have remained very high.

Another key reason for a solid recovery is due to wider usage of FHA loans. Many lenders are trying to get HUD approval so they can make loans. Consumers are digesting the benefits of this safer loan product carrying a much lower interest rate. As consumers realize that FHA loans no longer carry the stigma as being purely for low-and-moderate income households with credit blemishes, more and more consumers will utilize the loans, thereby steadily replacing the disappearance of the subprime loans.

Tax rebate checks are showing up in bank accounts. Some say it is not enough to make an impact on the economy, but it did the last time when rebate checks went out in 2001. The current rebate checks are larger. Exports continue to ramp up solidly. Business profits are surprisingly solid - outside of homebuilders and financial industry. Business spending will grow as a result. These factors say that the economy will be better in the second half after having stalled in the first half. The improving economy will also uplift consumer spirits, some gaining enough confidence to buy a home.

Risks still exist. The very high oil prices could stick and that will hold back consumer spending growth. Inflation could notch higher, which then will result in higher mortgage rates. Still, the economy and the housing market look to markedly improve in the second half. The momentum will carry forward to 2009.

Copyright National Association of REALTORS®, Reprinted with permission.