posted on 29 February 2016
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 decline, and we are forecasting poor February home sales. The quote of the day from this NAR release:
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:
Econintersect's evaluation using unadjusted data:
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:
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 290,000 in February 2016.
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, 300,000 existing home unadjusted sales were forecast for January 2016 versus the actual reported number of 302,000 (which is subject to further revision).
Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line), 3 month rolling average (red line)
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:
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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