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 4.1% month-over-month and up 12.8% year-over-year
- the market was expecting up 0.5% to 1.0% (versus the 4.1% reported)
- index up 4.1% month-over-month and up 10.8% year-over-year
- this index value is predicting April 2012 existing home sales of 420,000 – which would be a 12.5% gain year-over-year in existing home sales
From the NAR press release:
The index is now at the highest level since April 2010 when it reached 111.3.
Lawrence Yun, NAR chief economist, said 2012 is expected to be a year of recovery for housing. “First quarter sales closings were the highest first quarter sales in five years. The latest contract signing activity suggests the second quarter will be equally good,” he said.
“The housing market has clearly turned the corner. Rising sales are bringing down inventory and creating much more balanced conditions around the county, which means home prices will be rising in more areas as the year progresses,” Yun said.
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 February 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 420,000 in April 2012 (includes a -13,000 fudge factor for historical error of this methodology in Aprils. 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 (March 2012), using this methodology – it was forecast sales of 375,000. Actual unadjusted sales were 361,000.
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.