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December 2012 Pending Home Sales Index Shows Slowdown

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The December 2012 pending home sales index released by the National Association of Realtors (NAR) was released today, and our analysis suggests:

  • Econintersect‘s uses the December pending home sales data to forecast the January 2013 home sales – and our January 2013 forecast is 265,000 (see details below);
  • If this 265,000 historical correlation is correct, this would only be a 1.1% gain year-over-year in January existing home sales, but still the 19th month in a row of year-over-year gains.
  • Unadjusted actual December existing home sales were down 8.0% month-over-month, Up 6.9% year-over-year. The rate of growth in 2012 was flat – in other words the growth rate is remaining inside a channel neither accelerating or decelerating.

The NAR reported the January pending home sales index down 4.3% month-over-month and up 6.9% year-over-year, while the market was expecting 0.0% (versus the -4.3% reported). Econintersect‘s evaluation shows the index down 3.9% month-over-month and up 4.8% year-over-year,.

From the NAR press release:

Pending home sales declined in December but have stayed above year-ago levels for 20 consecutive months, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 4.3 percent to 101.7 in December from 106.3 in November but is 6.9 percent higher than December 2011 when it was 95.1. The data reflect contracts but not closings.

Lawrence Yun , NAR chief economist, said there is an uneven uptrend. “The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis,” he said. “Buyer interest remains solid, as evidenced by a separate Realtor® survey which shows that buyer foot traffic is easily outpacing seller traffic.”

Yun said shortages of available inventory are limiting sales in some areas. “Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options,” he said. “We expect a seasonal rise of inventory in the spring to help, but a seller’s market may be developing. Much of the West is already a seller’s market for homes priced under a million dollars, but conditions are much more balanced in the Northeast.”

Even with tighter inventory, a pent-up demand and favorable affordability conditions bode well for the market. Yun expects existing-home sales to increase another 9 percent in 2013, following a 9 percent rise in 2012.

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 265,000 in January 2013 (including a +11,000 fudge factor) for historical error of this methodology for the month of January 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, 385,000 (including a +52,000 fudge factor) existing home unadjusted sales were forecast for December 2012 sales vs the actual reported number of 373,000 (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 – while the December numbers returned to the average rate of growth for 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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Analysis Blog articles on Housing

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