June 2013 Pending Home Sales Index Declines

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

  • The current trends (using 3 month rolling averages) continues to show a moderate acceleration in pending home sales. This is due to a significant growth jump 3 months ago – but the last two months growth has been decelerating.

  • Extrapolating this data to project July home sales, this would be a 8.2% gain year-over-year in July existing home sales, and the 26th month in a row of year-over-year gains.

The NAR reported June pending home sales index down 0.4% month-over-month and up 10.9% year-over-year. The market was expecting contraction of 1.0% to 1.7% (versus the -0.4% reported). Econintersect‘s evaluation shows the index growth decelerated 2.1% month-over-month and up 9.1% year-over-year.

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:

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, edged down 0.4 percent to 110.9 in June from a downwardly revised 111.3 in May, but is 10.9 percent higher than June 2012 when it was 100.0; the data reflect contracts but not closings.  Pending sales have been above year-ago levels for the past 26 months, and the pace in May was the highest since December 2006 when it reached 112.8.

Lawrence Yun, NAR chief economist, said higher home prices and interest rates are beginning to impact affordability, notably in high-cost regions.  “Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June,” he said.  “The persistent lack of inventory also is contributing to lower contract signings.”

Yun notes not all contracts go to closing.  “There are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates.  Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their minds if the rate rises too much, which apparently happened with some sales scheduled to close in June,” he said.  “Closed sales may edge down a bit in the months ahead, but they’ll stay above year-ago levels.”

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 June 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 465,000 in July 2013 (negative 18,000 fudge factor this month for historical error of this methodology for the month of Junes in years past).

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, 500,000 (negative 50,000 fudge factor) existing home unadjusted sales were forecast for June 2013 sales vs the actual reported number of 501,000 (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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