Pending Home Sales Do Not Foretell Housing Recovery Is Underway

Pending home sales, an index produced by the National Association of Realtors (NAR) does not indicate there will be year-over-year (YoY) improvement in existing home sales according to their March 2011 release.  Yet, the NAR was able to put a positive spin on the data.

March saw another increase in pending home sales, with contract activity rising unevenly in six of the past nine months, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 5.1 percent to 94.1 in March from a downwardly revised 89.5 in February. The index is 11.4 percent below 106.2 in March 2010; however, activity was at elevated levels in March and April of 2010 to meet the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said home sales activity has shown an uneven but notable improvement. “Since reaching a cyclical bottom last June, pending home sales have posted an overall gain of 24 percent and demonstrate the market is recovering on its own,” he said. “The index means modest near-term gains in existing-home sales are likely, which would be even stronger if tight mortgage lending criteria returned to normal, safe standards.”

“Based on the current uptrend with very favorable affordability conditions, rising apartment rents and ongoing job creation, existing-home sales should rise around 5 to 10 percent this year with sales growth of lower priced homes likely to outperform high-end homes. That means the price trend will reflect more homes sold in the lower price ranges,” Yun said.

“The good news is that recent home buyers are staying well within budget, leading to exceptionally low loan default rates among home buyers over the past two years,” Yun added.

Through the magic of smoke, mirrors and innovative seasonal adjustment methodology – the NAR creates an illusion some sort of housing recovery is underway.  The truth is that for 8 of the last 9 months, home sales are down YoY.  It has been 9 months since the last home buyers stimulus expired.

The graph above uses a one month offset on the unadjusted pending home sales index, and graphs it against the unadjusted NAR home sales data.  The index however – is slightly higher then the levels seen in 2009.  If we ignore the stimulus months, it could be argued sales are getting better – but that is not the way seasonal adjustment methods work.

Based on Econintersect’s analysis, Existing home sales in April 2011 should come in at 455,000 – an 11% decline over 201o.  Last month the index declined 9% YoY.  Using this methodology, Econintersect projected March 2011 home sales to be 340,000 – and the actual sales came in at 402,000 (analysis here).

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.

There is no question a normal historical spring home sales increase is underway.  The question is whether it is better or worse than last year.

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