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posted on 29 November 2017

October 2017 Pending Home Sales Seasonally Adjusted Index Rose Strongly

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index rose strongly following three straight months of diminishing activity, but continued to fall behind year ago levels. The quote of the day from this NAR release:

... Until new home construction climbs even higher and more investors and homeowners put their home on the market, sales will continue to severely trail underlying demand. ...

Analyst Opinion of Pending Home Sales

The rolling averages are in negative 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, although the trends are now upward.

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 rose 3.5 % month-over-month and down 0.6 % year-over-year.
  • The market [from Bloomberg / Econoday} was expecting month-over-month growth of 0.6 % to 2.0 % (consensus +1.0 %) versus the 3.5 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth rate was up 6.9 % month-over-month and up 1.2 % year-over-year.
  • The current trend (using 3 month rolling averages) is improving but in contraction.
  • Extrapolating the pending home sales unadjusted data to project November 2017 existing home sales would be down 8.7 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

.... pending sales in October were primarily driven higher by a big jump in the South, which saw a nice bounce back after hurricane-related disruptions in September. Last month's solid increase in contract signings were still not enough to keep activity from declining on an annual basis for the sixth time in seven month. Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would-be buyers from reaching the market.

The supply and affordability headwinds seen most of the year have not abated this fall. Although homebuilders are doing their best to ramp up production of single-family homes amidst ongoing labor and cost challenges, overall activity still drastically lags demand. Further exacerbating the inventory scarcity is the fact that homeowners are staying in their homes longer. NAR's 2017 Profile of Home Buyers and Sellers - released last month - revealed that homeowners typically stayed in their home for 10 years before selling (an all-time survey high). Prior to 2009, sellers consistently lived in their home for a median of six years before selling.

Existing inventory has decreased every month on an annual basis for 29 consecutive months, and the number of homes for sale at the end of October was the lowest for the month since 1991. Until new home construction climbs even higher and more investors and homeowners put their home on the market, sales will continue to severely trail underlying demand.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 380,000 in November 2017.

Using this methodology, 435,000 existing home unadjusted sales were forecast in October 2017 versus the actual reported number of 458,000 (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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