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April 2012 Pending Home Index Continues To Show Improving Home Sales

Written by Steven Hansen

According to Econintersect, the April 2012 pending home sales index released by the National Association of Realtors (NAR) suggests:

  • May 2012 existing home sales of 400,000 (see details below);
  • It this 400,000 historical correlation is correct, this would be a 3.2% gain year-over-year in May existing home sales, and the 9th month in a row of year-over-year gains

The NAR reported the April pending home sales index down 5.5% month-over-month and up 14.4% year-over-year, while the market was expecting up 0.6% to 2.0% (versus the decline of 5.5% reported).

Econintersect analysis shows the index up 4.2% month-over-month and up 14.7% year-over-year.   Overall this pending home data release shows the improvement in the existing home sales market is continuing – and one should ignore the NAR headline month-over-month decline as it is caused by seasonal adjustment methodology and an overly strong data point from the previous month.

From the NAR press release:

Pending home sales retrenched in April following three consecutive monthly gains, but are notably higher than a year ago, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, declined 5.5 percent to 95.5 from a downwardly revised 101.1 in March but is 14.4 percent above April 2011 when it was 83.5.  The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said a one-month setback in light of many months of gains does not change the fundamentally improving housing market conditions.  “Home contract activity has been above year-ago levels now for 12 consecutive months. The housing recovery momentum continues,” he said.

Yun notes home sales are staying well above the levels seen from 2008 through 2011.  “Housing market activity has clearly broken out at notably higher levels and is on track to see the best performance since 2007,” he said.  “All of the major housing market indicators are expected to trend gradually up, but a new federal budget must be passed before the end of the year for the economy to continue to move forward.”

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 29% of home sales in April 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 May 2012 (includes a -19,000 fudge factor for historical error of this methodology in Mays. 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).  Using this methodology, 430,000 existing home sales were forecast in April 2012 vs the actual reported number of 400,000 (which is subject to further revision).

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.

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Analysis Blog articles on Housing

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