Written by Steven Hansen
The April 2013 pending home sales index was released by the National Association of Realtors (NAR) today, and our analysis suggests:
- Econintersect‘s uses this April 2013 pending home sales data to forecast the May 2013 home sales – and our forecast for May is 480,000 (see details below);
- If this 440,000 historical correlation is correct, this would only be a 8.1% gain year-over-year in May existing home sales, and the 24th month in a row of year-over-year gains.
The NAR reported the April pending home sales index up 0.3% month-over-month and up 10.3% year-over-year. The market was expecting growth of 0.0% to 0.5% (versus the 0.3% reported). Econintersect‘s evaluation shows the index up 8.6% month-over-month and up 14.5% year-over-year.
The current trends (using 3 month rolling averages) now show and acceleration in home sales.
Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)
From Lawrence Yun , NAR chief economist:
A familiar pattern has developed. The housing market continues to squeak out gains from already very positive conditions. Pending contracts so far this year easily correspond to higher closed home sales in 2013. Total existing-home sales are expected to rise just over 7 percent to about 5 million this year.
Because of inventory shortages, higher home sales will push up home values to the highest level in five years,. The national median existing-home price should increase close to 8 percent and exceed $190,000 in 2013.
The PHSI in the Northeast jumped 11.5 percent to 92.3 in April and is 17.7 percent above a year ago. In the Midwest the index rose 3.2 percent to 107.1 in April and is 15.1 percent higher than April 2012. Pending home sales in the South slipped 1.1 percent to an index of 119.2 in April but are 12.3 percent above a year ago. With pronounced inventory constraints, the index in the West fell 7.6 percent in April to 94.6 and is 2.6 percent below April 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 April 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 480,000 in May 2013 (no fudge factor this month for historical error of this methodology for the month of Aprils 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, 440,000 (including a -20,000 fudge factor) existing home unadjusted sales were forecast for April 2013 sales vs the actual reported number of 454,000 (which is subject to further revision).
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.
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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