The Mortgage Moment

The number of homes under contract to sell increased in May.

It’s the fourth straight month in which sales volume increased, corroborating the growing notion that housing is on the mend in most U.S. markets.

Consider these other housing-related stories from the past month:

• Existing Home Sales are rising
• New home supplies are falling
• The Case-Shiller Index is turning positive-like

Put it all together and it looks like the housing market is about to reach its bottom (if it hasn’t already).

But just because homes are going under contract to sell doesn’t mean that they actually will sell. A “deal” can fall apart for all sorts of reasons including failed home inspections, buyer-seller disputes, and mortgage-related problems.

In general, though, as the number of pending contracts increase, we find that Existing Home Sales rise, too, some 45-60 days into the future. And so long as buyers’ demand for homes remains strong, we would expect that home prices edge higher.

It’s too soon to say that housing has turned the corner for certain, but there’s an awful lot of data lately that suggests that it has.

Tuesday — for the first time in a long while — members of the press met the monthly Case-Shiller Index data with enthusiasm. And why shouldn’t they? 19 of the 20 measured markets showed a slowing pace of home price decline in April.

Here are some of the headlines about the story:

• Case-Shiller Home Prices Decline Only 18% (Business Week)
• Case-Shiller Less Bad (Seeking Alpha)
• Home Prices In 20 Cities Drop Less Than Expected (Bloomberg)

Now, the headlines feel negative, but they’re actually highlighting some key strengths in April’s figures. For example, nearly half of the Case-Shiller markets posted gains in April and all but one showed month-over-month improvement.

It’s a step in the right direction but doesn’t mean that housing has turned around for good.

We have to be careful about how we interpret the Case-Shiller Index because it’s an imperfect housing gauge. The most obvious Case-Shiller flaw is that it only measures home values in 20 cities nationwide and they’re not even the 20 biggest cities.

Houston, Philadelphia, San Antonio and San Jose are excluded from the report and each ranks among the country’s 10 most populous areas.

That said, the report is still important because the Case-Shiller Index identifies broader housing trends and that helps to shape economic policy.

Not only versus last month but also versus last year, the pace at which home values are falling appears to be getting slower. This is the third straight month Case-Shiller has reported as such.

Now, three months makes a trend, but the data has to stay strong through the summer months to mark a bona fide turnaround. If the Case-Shiller Index shows strength for May and June, it could be the signal for which the markets have been waiting.