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posted on 30 December 2015

November 2015 Pending Home Sales Index Weakens.

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined - and was well under expectations. Our analysis of pending home sales shows improvement - but does forecast relatively weak December existing home sales. The quote of the day from this NAR release:

Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months ...

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 down 0.9 % month-over-month and up 3.9 % year-over-year (last month was reported +2.7 % year-over-year).
  • The market was expecting month-over-month growth of 0.0 % to 2.4 % (consensus 0.5 %) versus the growth of -0.9 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth was up 2.8 % month-over-month and up 5.1 % year-over-year.
  • The current trends (using 3 month rolling averages) insignificantly declined but remains in expansion.
  • Extrapolating the pending home sales unadjusted data to project December 2015 existing home sales, this would be a 5.3 % contraction 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)

z pending2.png

From Lawrence Yun , NAR chief economist:

.... November's dip in contract activity continues the modestly slowing trend seen ever since pending sales peaked to an over nine year high back in May. Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains. While feedback from Realtors® continues to suggest healthy levels of buyer interest, available listings that are move-in ready and in affordable price ranges remain hard to come by for many would-be buyers.

With existing housing inventory already below year ago levels and new home construction still deficient, it's likely supply constraints and faster price appreciation will reappear once the spring buying season begins.

Especially with mortgage rates likely on the rise, affordability issues could creep up enough to temper sales growth - especially to first-time buyers in higher priced markets.

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 390,000 in December 2015.

Using Pending Home Sales to Predict Existing Homes Sales - Unadjusted Existing Home Sales (blue line) & Predictive Forecast Using Pending Home Sales Index (red line)

z pending1.PNG

Using this methodology, 370,000 existing home unadjusted sales were forecast for November 2015 versus the actual reported number of 351,000 (which is subject to further revision).

Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line), 3 month rolling average (red line)

z existing1.PNG

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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