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posted on 30 July 2018

June 2018 Pending Home Sales Seasonally Adjusted Index Remains In Contraction Year-over-Year

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved - yet the year-over-year contraction worsened. Our analysis shows continued worsening of growth. The quote of the day from this NAR release:

... The good news is that it is possible the worst of the supply crunch affecting most of the country has passed ...

Analyst Opinion of Pending Home Sales

The rolling averages remain 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 despite the headline growth, and the long term trends continue to be generally downward,

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 grew 0.9 % month-over-month and down 2.5 % year-over-year (reported down 2.2 % last month).
  • The market [from Nasdaq / Econoday} was expecting month-over-month growth of 0.3 % to 1.0 % (consensus +0.8 %).

Econintersect's evaluation using unadjusted data:

  • the index growth rate decelerated 1.1 % month-over-month and down 4.0 % 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 July 2018 existing home sales would be down 1.4 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

.... an uptick in existing inventory helped lift contract signings in June. After two straight months of pending sales declines, home shoppers in a majority of markets had a little more success finding a home to buy last month," he said. "The positive forces of faster economic growth and steady hiring are being met by the negative forces of higher home prices and mortgage rates. Even with slightly more homeowners putting their home on the market, inventory is still subpar and not meeting demand. As a result, affordability constraints are pricing out some would-be buyers and keeping overall sales activity below last year's pace.

The good news is that it is possible the worst of the supply crunch affecting most of the country has passed. Last month, existing inventory was up on an annual basis - albeit slightly - for the first time in three years1. Furthermore, pointing to realtor.com® data on year-over-year changes in inventory in June, several large metro areas saw big jumps in active listings, including Portland, Oregon (24 percent), Providence, Rhode Island (20 percent), Seattle (19 percent), Nashville, Tennessee (17 percent) and San Jose, California (15 percent).

Home price growth remains swift and listings are still going under contract at a robust pace in most of the country, which indicates that even with rising inventory in many markets, demand still significantly outpaces what's available for sale. However, if this trend of increasing supply continues in the months ahead, prospective buyers will hopefully begin to see more choices and softer price growth.

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 July 2018.

Using this methodology, 575,000 existing home unadjusted sales were forecast in June 2018 versus the actual reported number of 570,000 (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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