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posted on 30 January 2017

December 2016 Pending Home Sales Index Improves?

Written by Steven Hansen

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

... contract activity was mixed throughout the country in December but ultimately ended on a high note to close out 2016 ...

Analyst Opinion of Pending Home Sales

The unadjusted data shows the rate of year-over-year growth declined this month - and the rolling averages declined. I see no signs that the residential sales market is improving.

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 1.6 % month-over-month and up 0.3 % year-over-year.
  • The market was expecting month-over-month growth of -1.8 % to 1.5 % (consensus +0.6 %) versus the +1.6 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth rate was decelerated 3.4 % month-over-month and down 2.0 % year-over-year.
  • The current trends (using 3 month rolling averages) are decelerating..
  • Extrapolating the pending home sales unadjusted data to project January 2017 existing home sales would be a 2.6 % contraction year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

.... contract activity was mixed throughout the country in December but ultimately ended on a high note to close out 2016. Pending sales rebounded last month as enough buyers fended off rising mortgage rates and alarmingly low inventory levels1 to sign a contract. The main storyline in the early months of 2017 will be if supply can meaningfully increase to keep price growth at a moderate enough level for households to absorb higher borrowing costs. Sales will struggle to build on last year's strong pace if inventory conditions don't improve."

A large portion of overall supply right now is at the upper end of the market. This is evident by looking at December data on the year-over-year change in single-family sales by price range. Last month, sales were up around 10 percent compared to December 2015 for homes sold at or above $250,000, while homes sold between $100,000 and $250,000 only increased 2.3 percent. Meanwhile, sales of homes under $100,000 were down 11.6 percent compared to a year ago.

The dismal number of listings in the affordable price range is squeezing prospective first-time buyers the mos. As a result, young households are missing out on the wealth gains most homeowners have accrued from the 41 percent cumulative rise in existing home prices since 2011.

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 295,000 in January 2017.

Using this methodology, 420,000 existing home unadjusted sales were forecast for December 2016 versus the actual reported number of 437,000 (which is subject to further revision).

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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