Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index insignificantly improved – and was under expectations. Our analysis of pending home sales shows decline – but does forecast relatively stronger existing home sales in January. The quote of the day from this NAR release:
… it’s possible overall demand could be somewhat curtailed in coming months …
Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).
The NAR reported:
- Pending home sales index was up 0.1 % month-over-month and up 4.2 % year-over-year.
- The market was expecting month-over-month growth of -0.5 % to 2.0 % (consensus 0.8 %) versus the growth of 0.1 % reported.
Econintersect‘s evaluation using unadjusted data:
- the index growth was down 1.8 % month-over-month and up 3.1 % year-over-year.
- The current trends (using 3 month rolling averages) insignificantly declined but remains in expansion.
- Extrapolating the pending home sales unadjusted data to project January 2016 existing home sales, this would be a 5.3 % contraction year-over-year for existing home sales.
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:
…. contract activity closed out the year on stable footing but lost some momentum, except for in the Northeast. Warmer than average weather and more favorable inventory conditions compared to other parts of the country encouraged more households in the Northeast to make the decision to buy last month. Overall, while sustained job creation is spurring more activity compared to a year ago, the ability to find available homes in affordable price ranges is difficult for buyers in many job creating areas. With homebuilding still grossly inadequate, steady price appreciation and tight supply conditions aren’t going away any time soon.
According to Yun, although healthy labor market conditions will persuade more households to buy, it’s possible overall demand could be somewhat curtailed in coming months. The stock market’s sizeable losses since the start of the year and the effect slowing manufacturing activity is having in some areas — especially in the energy sector — could cause some to hold off on buying.
“The silver lining from the market turmoil in recent weeks is the fact that mortgage rates have slightly declined,” says Yun. “Buyers looking to close on a home before the spring buying season begins may be rewarded with a mortgage rate at or below 4 percent.”
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 forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 300,000 in January 2016.
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, 390,000 existing home unadjusted sales were forecast for December 2015 versus the actual reported number of 438.000 (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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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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