May 2012 Pending Home Sales Index Has Strong Gain

Written by Steven Hansen

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

  • June 2012 unadjusted existing home sales of 520,000 (see details below);
  • It this 520,000 historical correlation is correct, this would be a 18.0% gain year-over-year in June existing home sales, and the 13th month in a row of year-over-year gains

The NAR reported the June pending home sales index up 5.9% month-over-month and up 14.4% year-over-year, while the market was expecting up 0.5% to 1.0% (versus the 5.9% reported).

Econintersect analysis shows the index up 5.9% month-over-month and up 13.3% year-over-year. Overall this pending home data release shows the improvement in the existing home sales market is continuing.

From the NAR press release:

Pending home sales bounced back in May, matching the highest level in the past two years, and are well above year-ago levels, according to the National Association of Realtors®.  Both monthly and annual gains were seen in every region.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 5.9 percent to 101.1 in May from 95.5 in April and is 13.3 percent above May 2011 when it was 89.2.  The data reflect contracts but not closings.

The index also reached 101.1 in March, which is the highest level since April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit.

Lawrence Yun, NAR chief economist, said longer term comparisons are more relevant.  “The housing market is clearly superior this year compared with the past four years.  The latest increase in home contract signings marks 13 consecutive months of year-over-year gains,” he said.  “Actual closings for existing-home sales have been notably higher since the beginning of the year and we’re on track to see a 9 to 10 percent improvement in total sales for 2012.”

The national median existing-home price is expected to rise 3.0 percent this year and another 5.7 percent in 2013.

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 28% of home sales in May 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 520,000 in June 2012 (includes a 70,000 fudge factor for historical error of this methodology in Junes. 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, 420,000 existing home sales were forecast in May 2012 vs the actual reported number of 444,000 (which is subject to further revision).

As shown on the above graphic, since mid 2011 home sales have been positively growing year-over-year. However, the strong rate of growth seen since mid-2010 appears to have moderated as shown on the graph below.

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).

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