Pending Home Sales in December 2011 Projects a Weak January

The National Association of Realtors (NAR) pending home sales index fell 3.5% month-over-month (up 4.4% unadjusted year-over-year) in December 2011Econintersect analysis indicates a forecast range of January 2012 existing home sales forecasts between sales falling 2.7% year-over-year to rising 1.5% year-over-year depending on your analytical poison.

From the NAR press release:

After reaching a 19-month high, pending home sales eased in December but stayed above year-ago levels, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, declined 3.5 percent to 96.6 in December from 100.1 in November but is 5.6 percent above December 2010 when it was 91.5. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said the trend line remains positive. “Even with a modest decline, the preceding two months of contract activity are the highest in the past four years outside of the homebuyer tax credit period,” he said. “Contract failures remain an issue, reported by one-third of Realtors® over the past few months, but home buyers are not giving up.”

Yun said some buyers successfully complete the sale after a contract delay, while others stay in the market after a contract failure and make another offer. “Housing affordability conditions are too good to pass up,” he said. “Our hope is lending conditions will gradually improve with sustained increases in closed existing-home sales.”

The National Association of Realtors (NAR) pending home sales index offers a window into predicting January existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 31% of home sales in December 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 240,000 in January 2012. Historically, this methodology is pretty accurate in forecasting Januarys, however the miss in January 2011 was 17,000 (Econintersect‘s forecast was too low).

If January 2012 unadjusted existing home sales come in at 240,000, it would mean a year-over-year decline of 2.7%.  Please note that the unadjusted pending home sales index improved 4.4% year-over-year, and if January 2012 repeats the pattern of January 2011 – existing home sales would be as high as 250,000 – indicating a sales improvement of 1.5%.

Be advised that Econintersect changed the prediction calculators to correspond to the change in the NAR existing home sales benchmark (read about this here).  Econintersect‘s methodology produced:

  • a huge miss on the August home sales which came in at 502,000 versus the forecast 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%.
  • tiny miss in December 2011 with the adjusted forecast at 360,000 and the actual at 350,000.

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

With the first time home buyers stimulus affected data out of the way of year-over-year comparisons, January 2012 will be the seventh month that real comparable data for existing home sales gives a true gauge of the health of real estate unperturbed by stimulus.

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 the second half of 2011. Recognizing that caveat, the recent “less good” year-over-year improvement in existing home sales volumes is disappointing.

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 – and if the current less good trend lines continue, they are indicating a potential contraction year-over-year in January 2012.

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.

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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