February 2013 Pending Home Sales Index Declines

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The February 2013 pending home sales index was released by the National Association of Realtors (NAR) today, and our analysis suggests:

  • Econintersect‘s uses this February 2013 pending home sales data to forecast the March 2013 home sales – and our forecast for March is 355,000 (see details below);
  • If this 355,000 historical correlation is correct, this would only be a 9.0% gain year-over-year in March existing home sales, and the 21th month in a row of year-over-year gains.
  • Unadjusted actual February existing home sales were down 5.7% month-over-month, Up 6.3% year-over-year. The rate of growth over the last 12 months was flat – in other words the growth rate is remaining inside a channel neither accelerating or decelerating.

The NAR reported the February pending home sales index down 0.4% month-over-month and up 8.4% year-over-year. The market was expecting 2.0% (versus the -0.4% reported). Econintersect‘s evaluation shows the index down 4.6% month-over-month and up 5% year-over-year.

Econintersect is concerned with a developing trend of a cooling home market.  The graph below puts the issue into perspective – where a “less good” home sales trend started in December 2012.

Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)

/images/z pending2.png

From Lawrence Yun , NAR chief economist:

Limited inventory is holding back the market in many areas. Only new home construction can genuinely help relieve the inventory shortage, and housing starts need to rise at least 50 percent from current levels. Most local home builders are small businesses and simply don’t have access to capital on Wall Street. Clearer regulatory rules, applied to construction loans for smaller community banks and credit unions, could bring many small-sized builders back into the market.

The PHSI in the Northeast declined 2.5 percent to 82.8 in February but is 6.8 percent above February 2012. In the Midwest the index rose 0.4 percent to 103.6 in February and is 13.2 percent higher than a year ago. Pending home sales in the South slipped 0.3 percent to an index of 118.8 in February but are 12.1 percent above February 2012. In the West the index increased 0.1 percent in February to 101.4 but is 0.8 percent below a year ago.

Existing-home sales are predicted to rise about 7 percent in 2013 to approximately 5 million sales, which is near the current level of activity. The volume of home sales appears to be leveling off with the constrained inventory conditions, and the leveling of the index means little change is likely in the pace of sales over the next couple 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 29% of home sales in January 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 355,000 in March 2013 (including a +30,000 fudge factor) for historical error of this methodology for the month of March 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, 310,00 (including a -15,000 fudge factor) existing home unadjusted sales were forecast for February 2013 sales vs the actual reported number of 305,000 (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.

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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