September 2012 Pending Home Sales Continues to Predict Softening

Written by Steven Hansen

The September 2012 pending home sales index released by the National Association of Realtors (NAR) suggests:

  • Econintersect‘s October 2012 forecast for unadjusted existing home sales is 365,000 (see details below);
  • If this 365,000 historical correlation is correct, this would be a 6.8% gain year-over-year in October existing home sales, and the 16th month in a row of year-over-year gains.
  • unadjusted actual September existing home sales were down 1.1% month-over-month, Up 8.5% year-over-year – which means the “less good” trend in existing home sales will continue

The NAR reported the September pending home sales index up 0.3% month-over-month and up 14.6% year-over-year, while the market was expecting 1.0% to 2.4% (versus the 0.3% reported).   Econintersect‘s evaluation is therefor more pessimistic.

From the NAR press release:

Pending home sales were little changed in September but remain 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, edged up 0.3 percent to 99.5 in September from 99.2 in August and is 14.5 percent above September 2011 when it was 86.9. The data reflect contracts but not closings.

Lawrence Yun , NAR chief economist, said pending home sales continue to hold a higher ground. “Home contract activity remains at an elevated level in contrast with recent years, but currently appears to be bouncing around in a narrow range,” Yun said. “This means only minor movement is likely in near-term existing-home sales, but with positive underlying market fundamentals they should continue on an uptrend in 2013.”

Pending home sales have risen for 17 consecutive months on a year-over-year basis, leading to the solid recovery seen in closed existing-home sales this year. In September all regions were showing double-digit increases in contract activity from a year ago with the exception of the West, which is constrained by limited inventory.

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 September 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 365,000 in October 2012 (including a +33,000 fudge factor) for historical error of this methodology for the month of October 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)

/images/z pending1.PNG

Using this methodology, 402,000 (including a -22,000 fudge factor) existing home unadjusted sales were forecast in September 2012 vs the actual reported number of 377,000 (which is subject to further revision). Existing home sales (unadjusted) were down 8.8% month-over-month, Up 2.1% year-over-year in September.

Unadjusted Year-over-Year Change in Existing Home Sales Volumes

/images/z existing1.PNG

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.  However, September sales were the worst growth seen in 2012.

Keeping things real – home sales volumes are only 65% 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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