Written by Steven Hansen
The short and sweet version of the Econintersect analysis of the National Association of Realtors (NAR) pending home sales index:
- index up 2.0% month-over-month and up 8.0% year-over-year
- index up 5.7% month-over-month and up 10.1% year-over-year
- this index value is predicting February 2012 existing home sales of 275,000 – which would be a 9.1% gain year-over-year in existing home sales
From the NAR press release:
Pending home sales are on an upward trend, which has been uneven but meaningful since reaching a cyclical low last April, and are well above a year ago, according to the National Association of Realtors®.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 2.0 percent to 97.0 in January from a downwardly revised 95.1 in December and is 8.0 percent higher than January 2011 when it was 89.8. The data reflects contracts but not closings.
The January index is the highest since April 2010 when it reached 111.3 as buyers were rushing to take advantage of the home buyer tax credit.
Lawrence Yun, NAR chief economist, said this is a hopeful indicator going into the spring home-buying season. “Given more favorable housing market conditions, the trend in contract activity implies we are on track for a more meaningful sales gain this year. With a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”
Please note that the unadjusted index values did not change – and last month’s analysis of pending home sales remains valid.
The National Association of Realtors (NAR) pending home sales index offers a window into predicting existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 33% of home sales in January 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 275,000 in February 2012 (includes a -18,000 fudge factor for historical error of this methodology in Februarys. Note the graph below does not include fudge factors.
Be advised that Econintersect changed the prediction calculators to correspond to the change in the NAR existing home sales benchmark (read about this here). Last month (January 2012), using this methodology – it was forecast sales between 240,000 and 250,000. Actual unadjusted sales were 257,000.
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 eighth 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, 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.
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).
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.