November 2014 Pending Home Sales Seasonally Adjusted Index Improves - Our Analysis Differs
Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved and remains in expansion for the third month in a row after a year in contraction. Our analysis of pending home sales however is darker - and we are projecting a bad month for December existing home sales.
Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).
The NAR reported:
- Pending home sales index was up 0.8% month-over-month and up 4.1% year-over-year.
- The market was expecting month-over-month growth of -0.2% to 3.5% (consensus 0.5%) versus the growth of 0.8% reported.
Econintersect‘s evaluation using unadjusted data:
- the index growth decelerated 0.5% month-over-month but up 1.7% year-over-year.
- The current trends (using 3 month rolling averages) improved - and are in expansion.
- Extrapolating the unadjusted data to project December 2014 existing home sales, this would be a 3.3% decline year-over-year for existing home sales.
Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)
From Lawrence Yun , NAR chief economist:
.... signed contracts inched forward in November and have been fairly stable but haven't broken out even as the economy picked up steam this spring. The consistent economic growth and steady hiring we've seen the second half of this year is giving buyers enough assurance to consider purchasing a home before year's end. With rents now rising at a seven-year high, historically low rates and moderating price growth are likely to entice more buyers to enter the market in upcoming months.
.... falling gas prices will likely boost consumer confidence and allow prospective buyers the opportunity to save additional money for a downpayment. NAR's 2014 Profile of Home Buyers and Sellers (released in November) found that the median downpayment ranged from 6 percent for first-time buyers to 13 percent for repeat buyers.
The National Association of Realtors (NAR) pending home sales index offers a window into predicting existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers can close quickly), or in the following two months.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 375,000 in December 2014 (a positive 50,000 fudge factor this month for historical error using this methodology for the month of Decembers in years past).
Using Pending Home Sales to Predict Existing Homes Sales – Unadjusted Existing Home Sales (blue line) & Predictive Forecast Using Pending Home Sales Index (red line)
Using this methodology, 380,000 existing home unadjusted sales were forecast for November 2014 (with a negative 15,000 fudge factor) versus the actual reported number of 352,000 (which is subject to further revision).
Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line), 3 month rolling average (red line)
As shown on the above graphic, since mid 2011 home sales have been positively growing year-over-year. However, Since November 2013 home sales showed a contraction year-over-year for the first time since 2011 - and October 2014 was the first month of expansion - but November returned to contraction.
Keeping things real – home sales volumes are only 2/3rds of previous levels.
Caveats on the Use of Pending Home Sales Index
According to the NAR:
NAR’s Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity.
The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years.
…… When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a “pending home sale.” The majority of pending home sales become home sale transactions, typically one to two months later.
NAR now collects pending home sales data from MLSs and large brokers. Altogether, we receive data from over 100 MLSs & 60 large brokers, giving us a large sample size covering 50% of the EHS sample. This is equal to 20 percent of all transactions.
In other words, Pending Home Sales is an extrapolation of a sample equal to 20% of the whole. Econintersect uses Pending Home Index to forecast future existing home sales.
Econintersect reset the forecasting of existing home sales using the pending home sales index coincident with November 2011 Pending home sales analysis (see here) – as the NAR in November revised the historical existing home sales data.
The Econintersect forecasting methodology is influenced by the speed at which closings occur. When they slow down in a particular period – this method overestimates. The number of cash buyers are speeding up the process (cash buyers analysis here). A quick cash home sale process could begin and end in the same month. On the other hand, contracts for short sales can sometimes take months to close. Interpreting the pending home sales data is complicated by weighing offsetting effects in the current abnormal market.
Please note that Econintersect uses unadjusted data in its analysis.
Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).
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