June 2014 Pending Home Sales Below Expectations and Not Good

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index for June 2014 declined relative to last month.  Still, pending home sales index level is down SIGNIFICANTLY from a year ago, and our analysis suggests that July 2014 existing home sales will be worse than June’s – and will be contracting year-over-year.

• The current trends (using 3 month rolling averages) improved from the rolling averages one year ago in pending home sales – but continue to be in contraction.
• Extrapolating the unadjusted data to project July 2014 existing home sales, this would be an 11.2% contraction year-over-year existing home sales.
• Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).
• After 28 months of year-over-year growth, pending home sales according to the unadjusted data contracted year-over-year for the eighth month in a row.

The NAR reported June 2014 pending home sales index was down 1.1% month-over-month and down 7.3% year-over-year. The market was expecting month-over-month growth of -1.0% to 5.5% (consensus 0.3%) versus the growth of -1.1% reported. Econintersect‘s evaluation of the unadjusted data shows the index growth accelerated 2.4% month-over-month and down 4.5% 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)

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From Lawrence Yun , NAR chief economist:

…. says the housing market is stabilizing, but ongoing challenges are impeding full sales potential. “Activity is notably higher than earlier this year as prices have moderated and inventory levels have improved. However, supply shortages still exist in parts of the country, wages are flat, and tight credit conditions are deterring a higher number of potential buyers from fully taking advantage of lower interest rates.”

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 can close quickly), 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 unadjusted existing home sales of 460,000 in July 2014 (no fudge factor this month for historical error using this methodology for the month of July’s 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)

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Using this methodology, 485,000 (negative 45,000 fudge factor), existing home unadjusted sales were forecast for June 2014 sales vs the actual reported number of 506,000 (which is subject to further revision).

Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line), 3 month rolling average (red line)

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As shown on the above graphic, since mid 2011 home sales have been positively growing year-over-year. However, Since November 2013 home sales showed a contraction year-over-year for the first time since 2011.

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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