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Pending Home Sales Index Improves in November 2011

The National Association of Realtors (NAR) pending home sales index rose 5.9% year-over-year (6.9% unadjusted) in November 2011 suggesting a continuation of growth in existing home sales for the coming months.

From the NAR press release:

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 7.3 percent to 100.1 in November from an upwardly revised 93.3 in October and is 5.9 percent above November 2010 when it stood at 94.5. The October upward revision resulted in a 10.4 percent monthly gain.

The last time the index was higher was in April 2010 when it reached 111.5 as buyers rushed to beat the deadline for the home buyer tax credit. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said the gains may result partially from delayed transactions. “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high. Some of the increase in pending home sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage,” he said.

“November is doing reasonably well in comparison with the past year. The sustained rise in contract activity suggests that closed existing-home sales, which are the important final economic impact figures, should continue to improve in the months ahead,” Yun added.

Pending home sales are not affected by the recently published rebenchmarking of existing-home sales because the index uses a different methodology based directly on contract signings, and is adjusted for seasonality.

The National Association of Realtors (NAR) pending home sales index offers a window into predicting December existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 28% of home sales in November 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 305,000 in December 2011. Historically, this methodology is almost 55,000 low in predicting December exisiting home sales – so the likely December 2011 prediction is for 360,000.

If November 2011 unadjusted existing home sales come in at 360,000, it would mean a year-over-year growth of 4.3%.   Please be advised that Econintersect changed the prediction calculators to correspond to the change in the NAR existing home sales benchmark (read about this here).  Here is last months chart for your comparison.

Econintersect’s methodology produced:

  • a huge miss on the August home sales which came in at 502,000 versus the forecasted 450,000 (old data)
  • in September 2011, scored a direct hit with the Econintersect estimate at 440,000, and the actual sales volume at 433,000 (old data).
  • the forecast for October 2011(using historical fudge factors) was 405,000, and the actual sales volume was 401,000 (old data).
  • a big miss with the forecast at 385,000 and the actual coming in at 337,000 in November 2011.  Most of the miss is attributable to the new benchmark which lowered existing home sales (from 2007 onwards) in the range of 15%.

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, December 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, October and November 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 65% (based on the revised NAR home sales numbers) 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.

Please note that Econintersect uses unadjusted data in its analysis.

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.

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Analysis Blog articles on Housing

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