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posted on 30 November 2016

October 2016 Pending Home Sales Index Insignificantly Improves

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index insignificantly improved. The quote of the day from this NAR release:

... Those obtaining a mortgage last month were likely the last group of buyers to lock in a rate near historically low levels now that rates have marched to around 4 percent since the election. ...

Analyst Opinion of Pending Home Sales

The unadjusted data shows the rate of year-over-year growth slowed this month - but the rolling averages improved so I would more or less agree with he headline view. Even though I view the minutiae of the data differently, I agree with the NAR's bottom line. There is not enough inventory - and this is slowing sales volumes all whilst creating a price bubble. We continue to project growth in existing home sales, just not big year-over-year growth that were seen earlier last year.

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 0.1 % month-over-month and up 1.8 % year-over-year.
  • The market was expecting month-over-month growth of -1.0 % to 2.0 % (consensus +0.8 %) versus the growth of 0.1 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth rate was decelerated 1.8 % month-over-month and up 0.2 % year-over-year.
  • The current trends (using 3 month rolling averages) are slightly accelerating.
  • Extrapolating the pending home sales unadjusted data to project November 2016 existing home sales would be a 2.1 % growth 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:

.... October's minuscule uptick in contract activity nudged pending sales up to their highest level since July (111.2). Most of the country last month saw at least a small increase in contract signings and more notably, activity in all four major regions is up from a year ago. Despite limited listings and steadfast price growth that's now carried into the fall, buyer demand has remained strong because of the consistently reliable job creation in a majority of metro areas ....

Many of the successful shoppers in October likely had to move fast and outbid others for the few listings available in the affordable price range. Those obtaining a mortgage last month were likely the last group of buyers to lock in a rate near historically low levels now that rates have marched to around 4 percent since the election.

With contract activity holding steady, Yun expects existing sales to close out 2016 at a pace of around 5.36 million, which surpasses 2015 (5.25 million) and is the highest since 2006 (6.48 million).

Low supply has kept prices elevated all year and has put pressure on the budgets of buyers. With mortgage rates expected to rise into next year and put added strain on affordability, sales expansion will be contingent on more inventory coming onto the market and continued job gains.

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 360,000 in November 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)

z pending1.PNG

Using this methodology, 450,000 existing home unadjusted sales were forecast for October 2016 versus the actual reported number of 446,000 (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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