Written by Steven Hansen
The October 2012 pending home sales index released by the National Association of Realtors (NAR) suggests:
- Econintersect‘s November 2012 forecast for unadjusted existing home sales is 390,000 (see details below);
- If this 390,000 historical correlation is correct, this would be a 16.5% gain year-over-year in November existing home sales, and the 17th month in a row of year-over-year gains.
- unadjusted actual October existing home sales were up 17.6% month-over-month, Up 18.0% year-over-year – which indicates a growth spurt in existing home sales may be underway
The NAR reported the October pending home sales index up 5.2% month-over-month and up 13.2% year-over-year, while the market was expecting 1.0% (versus the 5.2% reported). Econintersect‘s evaluation is therefor better than the NAR analysis.
From the NAR press release:
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011 when it was 92.6. The data reflect contracts but not closings.
Lawrence Yun , NAR chief economist, said buyers are responding to favorable market conditions. “We’ve had very good housing affordability conditions for quite some time, but we’re seeing more impact now from steady job creation, and rising consumer confidence about home buying now that home prices have clearly turned positive.”
Outside of a few spikes during the tax credit period, pending home sales are at the highest level since March 2007 when the index also reached 104.8. On a year-over-year basis, pending home sales have risen for 18 consecutive months.
Yun noted there are clear regional patterns. “Contract activity surged in the Midwest and is showing very healthy gains in the South, but was down slightly in both the Northeast and West,” he said.
“The Northeast saw some impact from Hurricane Sandy, but limited inventory in the West is keeping a lid on the market. All regions are up from a year ago, with double-digit gains in every region but the West,” 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 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 390,000 in November 2012 (including a -10,000 fudge factor) for historical error of this methodology for the month of November 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, 365,000 (including a +33,000 fudge factor) existing home unadjusted sales were forecast in October 2012 vs the actual reported number of 404,000 (which is subject to further revision). Existing home sales (unadjusted) were down 1.1% month-over-month, Up 8.3% year-over-year in October.
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. However, October home sales were the best year-over-year growth seen in 2012.
Keeping things real – home sales volumes are only 2/3rds 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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