Andrew Busch
Global Finance Strategist
BMO Financial Group

This was a very good sign for the US housing market and for the credit crunch. June pending home sales (PHS) rose a surprising 5.3% vs expectations of a decline of 1.0%. The National Association of Realtors said that the index was lead by a 9.3% jump in sales in the South. This increase wipes out last month's decline and should mean that existing home sales (EHS) for July/August show gains.

PHS are essentially the leading indicator the housing market. These sales include homes, condos, and co-ops. The biggest complaint about EHS is that it counts only closings and that these closings occur many months (2-4) after buyers decide to purchase. PHS tracks contracts that are signed and awaiting closing.

We're all trying to figure out a bottoming process for the housing market. This is how it works:

1. Foreclosures and inventories of unsold homes begin to build up as sales decline.

2. Prices begin to fall as no one is buying. Builders stop getting permits and decrease starts.

3. Prices fall until we begin to find a level that buyers will step in and buy.

4. Prices may continue to fall until the inventory of unsold homes is reduced to more normalized levels (Five months).

5. Home prices stabilize when inventories are reduced and then prices of derivative products like mortgages and CMOs become attractive.

The increase in PHS is #3 in this process and this is why guys like Roubini and Syron think we're only half way through the price decline process. It will all come down to the speed at which inventories decline. Let's see what July EHS on August 25th looks like and how fast inventories decline with an increase in sales. I think this will happen faster than most expect and we could be normalized (Five months) by November. Remember, the YOY numbers will improve dramatically starting in September.

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. He can be reached here.

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