Written by Steven Hansen
According to Econintersect, the June 2012 pending home sales index released by the National Association of Realtors (NAR) suggests:
- July 2012 unadjusted existing home sales of 420,000 (see details below);
- If this 420,000 historical correlation is correct, this would be a 8.3% gain year-over-year in July existing home sales, and the 13th month in a row of year-over-year gains.
The NAR reported the June pending home sales index down 1.4% month-over-month but up 9.4% year-over-year, while the market was expecting up 0.9% to 1.0% (versus the -1.4% reported). Econintersect believes this NAR reported data does not completely convey how soft the data was this month.
Econintersect analysis shows the index down 6.3% (versus last months +0.0%) month-over-month but up 8.4% year-over-year. Even though this less good data is disappointing, it remains evident that the improvement in the home sales markets continue.
From the NAR press release:
Pending home sales declined in June but marked 14 consecutive months of year-over-year gains, according to the National Association of Realtors®
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 1.4 percent to 99.3 in June from a downwardly revised 100.7 in May but is 9.5 percent higher than June 2011 when it was 90.7. The data reflect contracts but not closings.
Lawrence Yun, NAR chief economist, said inventory shortages are a factor. “Buyer interest remains strong but fewer home listings mean fewer contract signing opportunities,” Yun said. “We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors.”
According to the Realtors® Confidence Index, the buyer traffic index stood at 60 in June while the seller index was 41, which shows a large imbalance between buyer and seller interest. A value of 50 implies neutral market conditions; the disparity between buyers and sellers began to grow in early spring and has been in a particularly large imbalance for the past two months.
“Any bank-owned properties that have been held back in markets with inventory shortages should be released expeditiously to help meet market demand,” Yun said. “Housing starts will likely need to double over the next two years to satisfy the pent-up demand for both rentals and ownership.”
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 June 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 430,000 in July 2012 (including a -12,000 fudge factor for historical error of this methodology for the month of July in years past. Note the graph below does not include fudge factors.
Using Pending Home Sales to Predict Existing Homes Sales – Unadjusted Existing Home Sales (blue line) & Predictive Forecast Using Pending Home Sales Index (red line)
Using this methodology, 520,000 (including a 70,000 fudge factor based on over-runs the last few months) existing home sales were forecast in June 2012 vs the actual reported number of 462,000 (which is subject to further revision).
Unadjusted Year-over-Year Change in Existing Home Sales Volumes
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 to a lower growth channel as shown on the graph above .
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).
Analysis Blog articles on Housing