Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis says the opposite and the rolling averages marginally improved. The quote of the day from this NAR release:
… sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. …
Analyst Opinion of Pending Home Sales
The unadjusted data shows the rate of year-over-year growth improved this month – and the more important rolling averages marginally improved. Because there is so much noise in the monthly numbers – the rolling averages are the best way to view the data.
I continue to see few signs that the residential sales market is improving.
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 down 0.8 % month-over-month and up 0.8 % year-over-year.
- The market [from Bloomberg / Econoday} was expecting month-over-month growth of -1.2 % to 3.7 % (consensus -0.4 %) versus the =0.8 % reported.
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 2.9 % month-over-month and up 0.5 % year-over-year.
- The current trends (using 3 month rolling averages) are marginally accelerating.
- Extrapolating the pending home sales unadjusted data to project April 2017 existing home sales would be a 3.1 % expansion year-over-year for existing home sales.
From Lawrence Yun , NAR chief economist:
…. sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range. In most areas, the lower the price of a home for sale, the more competition there is for it. That’s the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall.
Sellers are in the driver’s seat this spring as the intense competition for the few homes for sale is forcing many buyers to be aggressive in their offers, Buyers are showing resiliency given the challenging conditions. However, at some point — and the sooner the better — price growth must ease to a healthier rate. Otherwise sales could slow if affordability conditions worsen.
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 485,000 in March 2017.
Using this methodology, 415,000 existing home unadjusted sales were forecast for March 2017 versus the actual reported number of 456,000 (which is subject to further revision).
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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