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posted on 31 January 2018

December 2017 Pending Home Sales Seasonally Adjusted Index Again Rose Marginally

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index again rose marginally. Our analysis says the opposite. The quote of the day from this NAR release:

... the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand. However, there's no doubt the nation's most expensive markets with high property taxes are going to be adversely impacted by the tax law....

Analyst Opinion of Pending Home Sales

The rolling averages moved into 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, although the trends continue to be upward. I personally do not believe the new tax laws will affect home sales next year as most people do not consider income tax savings when buying a home.

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 0.5 % month-over-month and up 0.5 % year-over-year.
  • The market [from Bloomberg / Econoday} was expecting month-over-month growth of -0.3 % to 0.6 % (consensus +0.4 %) versus the +0.5 % reported.

Econintersect's evaluation using unadjusted data:

  • the index growth rate was down 2.3 % month-over-month and down 1.8 % year-over-year.
  • The current trend (using 3 month rolling averages) is decelerating and in contraction.
  • Extrapolating the pending home sales unadjusted data to project January 2018 existing home sales would be down 7.5 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

.... pending sales edged up in December and reached their highest level since last March (111.3). Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018. Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now.

Sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices — especially at the lower end of the market.

In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand. However, there's no doubt the nation's most expensive markets with high property taxes are going to be adversely impacted by the tax law.

Just how severe is still uncertain, but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas. This could in turn lead to both a decrease in sales and home values.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 300,000 in December 2017.

Using this methodology, 440,000 existing home unadjusted sales were forecast in December 2017 versus the actual reported number of 427,000 (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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