October 2011 Pending Home Sales Index Indicates Continued Home Sales Growth

The National Association of Realtors (NAR) pending home sales index rose 7.3% (unadjusted) year-over-year suggesting a continuation of growth in existing home sales for the coming months.

From the NAR press release:

Pending home sales rose strongly in October and remain above year-ago levels, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, surged 10.4 percent to 93.3 in October from 84.5 in September and is 9.2 percent above October 2010 when it stood at 85.5. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said improved contract activity is a hopeful sign. “Home sales have been plodding along at a sub-par level while interest rates are hovering at record lows and there is a pent-up demand from buyers who normally would have entered the market in recent years. We hope this is indicates more buyers are taking advantage of the excellent affordability conditions,” he said.

“Many consumers are recognizing that home buyers in the past two years have had one of the lowest default rates in history. Moreover, continued inventory declines are another healthy sign for the housing market,” Yun added.

The PHSI in the Northeast surged 17.7 percent to 71.3 in October and is 3.4 percent above October 2010. In the Midwest the index jumped 24.1 percent to 88.7 in October and remains 13.2 percent above a year ago. Pending home sales in the South rose 8.6 percent in October to an index of 99.5 and are 9.7 percent higher than October 2010. In the West the index slipped 0.3 percent to 105.5 in October but is 8.1 percent above a year ago.

“Although contract signings are up, not all contracts lead to closings. Many potential home buyers inadvertently hurt their credit scores and chances of getting a mortgage through easily averted actions, such as cancelling an old credit line while taking on a new one,” Yun said. “Such actions could unwittingly prevent buyers from obtaining a mortgage if their credit score is close the margins of qualifying, or they might get a loan but with less favorable terms.”

The National Association of Realtors (NAR) pending home sales index offers a window into predicting November existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 30% of home sales in September according to the NAR), or in the following two months.

Econintersect evaluates by offsetting the index one month to project existing home sales. Using this index offset one month suggests existing home sales of 385,000 in November 2011. Historically, this methodology is spot on in predicting Novembers.

If November 2011 existing home sales come in at 385,000, it would mean a year-over-year growth of 8.5%.

Econintersect’s methodology produced:

  • a huge miss on the August home sales which came in at 502,000 versus the forecasted 450,000
  • in September 2011, scored a direct hit with the Econintersect estimate at 440,000, and the actual sales volume at 433,000.
  • The forecast for October 2011(using historical fudge factors) was 405,000, and the actual sales volume was 401,000.

Please note that the NAR has been claiming significant contract cancellation percentages in past months – however, the correlations between the pending home sales index and actual data is not confirming this.

With the first time home buyers stimulus effected data out of the way of year-over-year comparisons, November 2011 will be the fifth month of real comparable data for existing home sales to have a true gauge of the health of real estate.

The abnormal dip in sales in the months following the end of the spring 2010 home buyers’ tax incentive should be at or near an end. This dip may have produced artificially good year-over-year comparisons in recent months. Recognizing that caveat, the trendline since the end of the stimulus shows positive real estate sales growth.

As shown on the above graphic, even though existing home sales were “less good” in September and October 2011 – existing home sales volumes are overall improving compared to the second half of 2010 which was effected by the first time home buyers stimulus withdrawal.

Keeping things real – home sales volumes are only 75% of previous levels – but the current trend lines are showing a slow movement towards higher existing home sales volumes.

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.

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 anecdotal evidence that contingencies in home contracts are increasing.  How this effects the timing of sale, or causes the sales contract to be cancelled is unknown.

Related Articles

Analysis Blog articles on Housing

Share this Econintersect Article:
  • Print
  • Digg
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • Wikio
  • email
  • RSS
This entry was posted in Home Sales and Home Prices and tagged , , , , , . Bookmark the permalink.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.