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November 2012 Pending Home Sales Show Housing Recovery Continues

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

  • Econintersect‘s uses the November pending home sales data to forecast the December 2012 home sales – and our December forecast is 385,000 (see details below);
  • If this 385,000 historical correlation is correct, this would be a 10.1% gain year-over-year in December existing home sales, and the 18th month in a row of year-over-year gains.
  • unadjusted actual November existing home sales were down 5.9% month-over-month, Up 15.5% year-over-year.  The rate of growth in 2012 is now flat – in other words the growth rate is remaining inside a channel neither accelerating or decelerating.

The NAR reported the November pending home sales index up 1.7% month-over-month and up 9.8% year-over-year, while the market was expecting 1.0% (versus the 1.7% reported). Econintersect‘s evaluation shows a higher year-over-year gain, but a month-over-month contraction.   A 9.8% year-over-year gain is weaker than the last 2 months.  I have no clue how almost every month the NAR can report a month-over-month gain.

From the NAR press release:

Pending home sales increased in November for the third straight month and reached the highest level in two-and-a-half years, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 1.7 percent to 106.4 in November from a downwardly revised 104.6 in October and is 9.8 percent above November 2011 when it was 96.9. The data reflect contracts but not closings.

The index is at the highest level since April 2010 when it hit 111.3 as buyers were rushing to beat the deadline for the home buyer tax credit. With the exception of several months affected by tax stimulus, the last time there was a higher reading was in February 2007 when the index reached 107.9.

Lawrence Yun , NAR chief economist, said home sales are on a sustained uptrend. “Even with market frictions related to the mortgage process, home contract activity continues to improve. Home sales are recovering now based solely on fundamental demand and favorable affordability conditions.”

On a year-over-year basis, pending home sales have risen for 19 consecutive months.

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 30% of home sales in November according to the NAR), or in the following two months.

Econintersect evaluates by offsetting the index one month to project unadjusted existing home sales. Using this index offset one month suggests existing home sales of 385,000 in December 2012 (including a +52,000 fudge factor) for historical error of this methodology for the month of December 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, 390,000 (including a -10,000 fudge factor) existing home unadjusted sales were forecast in November 2012 vs the actual reported number of 387,000 (which is subject to further revision).

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, October home sales were the best year-over-year growth seen in 2012, and the November data was second.

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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Analysis Blog articles on Housing

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