June 2011 Pending Home Sales Index Up – Is It Enough?

Based on the National Association of Realtors (NAR) June 2011 Pending Home Index, July existing home sales should be good.  The pending home sales index is an indicator based on the number of contracts for home purchases signed in a given month.

The actual home sale might appear in the month the contract was signed (cash buyers account for 29% of home sales), or in the following two months.  Econintersect evaluates by offsetting the index one month to project existing home sales.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 2.4 percent to 90.9 in June from 88.8 in May and is 19.8 percent above the 75.9 reading in June 2010, which was the low point immediately following expiration of the home buyer tax credit. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said there may be some increase in closed existing-home sales. “For the majority of transactions, the lag time between pending contacts to actual closings is one to two months. Therefore, the two consecutive months of rising activity should lead to overall improvement in closed sales in upcoming months,” he said. “Though a higher than normal cancellation rate can hold back final closing figures, it could well be that some past cancellations are nothing more than delayed buying decisions rather than outright cancellations.”

Using this index offset one month suggests existing home sales of 465,000 in July 2011.

Even using unadjusted data – this is a major uplift from a year ago.  Pending home index collapsed one year ago because of the expiry of the first home buyers stimulus.  The following graphic is from the June 2011 analysis of existing home sales.

The above graphic shows the huge drop of existing home sales in July 2010.  The projected 465,000 existing home sales would be less than June’s 508,000 – but seasonally good ignoring the effects of the stimulus.

The press release ended with the normal political statements the NAR has been dishing out.

Yun said tight credit and economic uncertainty have been constricting the market. “The best way to ensure a more solid recovery in housing is to simply return to normal, sound credit standards so more creditworthy home buyers can get a mortgage,” he said.

“Washington also should not rock the boat with policy changes that would negatively impact affordable credit or otherwise increase the cost of buying or owning a home,” Yun added.

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.

There is no question a normal historical spring home sales increase has been underway.  However, home sales are still down year-over-year for the data released so far this year.  July 2011 should break this year-over-year trend.

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