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posted on 31 August 2017

July 2017 Pending Home Sales Seasonally Adjusted Index Significantly Declines

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index significantly declined. Our analysis is more positive. The quote of the day from this NAR release:

... The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves. This seems unlikely given the inadequate pace of housing starts in recent months and the lack of interest from real estate investors looking to sell ...

Analyst Opinion of Pending Home Sales

The rolling averages are in positive territory. The data is very noisy and must be averaged to make sense of the situation. There is no signs of a surge in home sales, and the overall downward trends remain in play.

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 0.8 % month-over-month and diwb 1.3 % year-over-year.
  • The market [from Bloomberg / Econoday} was expecting month-over-month growth of -0.2 % to 0.8 % (consensus +0.8 %) versus the negative 0.8 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth rate was down 1.0 % month-over-month and down 0.5 % year-over-year.
  • The current trend (using 3 month rolling averages) is improving..
  • Extrapolating the pending home sales unadjusted data to project August 2017 existing home sales would be down 0.5 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

.... the staggering inventory woes throughout the country continue to stall contract activity. "With the exception of a minimal gain in the West, pending sales were weaker in most areas in July as house hunters saw limited options for sale and highly competitive market conditions," he said. "The housing market remains stuck in a holding pattern with little signs of breaking through. The pace of new listings is not catching up with what's being sold at an astonishingly fast pace."

According to Yun, in the past five years, the national median sales price has risen 38 percent, while hourly earnings have increased less than a third of that (12 percent). This unsustainable trend is putting considerable pressure on affordability in some markets - especially for prospective first-time buyers - and is pricing out some households who would otherwise be looking to buy a home. Despite this growing obstacle, Yun says data and feedback from Realtors® continues to confirm that the slowdown in existing sales since spring is the result of a supply problem and not one of diminished demand.

"Buyer traffic continues to be higher than a year ago, the typical listing has gone under contract within a month since April, and inventory at the end of July was 9.0 percent lower than last July," said Yun. "The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves. This seems unlikely given the inadequate pace of housing starts in recent months and the lack of interest from real estate investors looking to sell."

With autumn at the doorstep, Yun expects existing-home sales to close out the year at around 5.49 million, which is only an increase of 0.7 percent from 2016 (5.45 million). The national median existing-home price this year is expected to increase around 5 percent. In 2016, existing sales increased 3.8 percent and prices rose 5.1 percent.

"The combination of weaker contract signings and the expected pause in activity in the Houston region because of Hurricane Harvey will likely slow overall sales growth in coming months," said Yun.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 505,000 in August 2017.

Using this methodology, 575,000 existing home unadjusted sales were forecast for June 2017 versus the actual reported number of 601,000 (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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