Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis agrees. The quote of the day from this NAR release:
… contract activity is fading this spring because significantly weak supply levels are spurring deteriorating affordability conditions …
Analyst Opinion of Pending Home Sales
The unadjusted data shows the rate of year-over-year growth significantly deteriorated this month – and the more important rolling averages declined. 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 1.3 % month-over-month and down 3.3 % year-over-year.
- The market [from Bloomberg / Econoday} was expecting month-over-month growth of -0.5 % to 1.4 % (consensus +0.5 %) versus the -1.3 % reported.
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 6.0 % month-over-month and down 5.4 % year-over-year.
- The current trends (using 3 month rolling averages)is decelerating.
- Extrapolating the pending home sales unadjusted data to project April 2017 existing home sales would be a 4.4 % contraction year-over-year for existing home sales.
From Lawrence Yun , NAR chief economist:
…. contract activity is fading this spring because significantly weak supply levels are spurring deteriorating affordability conditions. Much of the country for the second straight month saw a pullback in pending sales as the rate of new listings continues to lag the quicker pace of homes coming off the market. Realtors® are indicating that foot traffic is higher than a year ago1, but it’s obviously not translating to more sales.
Prospective buyers are feeling the double whammy this spring of inventory that’s down 9.0 percent from a year ago and price appreciation that’s much faster than any rise they’ve likely seen in their income.
Unfortunately, there is little evidence these astoundingly low supply levels are going away soon. Homebuilding activity has not picked up enough this year and too few homeowners are listing their home for sale.
The unloading of single-family homes purchased by real estate investors during the downturn for rental purposes would also go a long way in helping relieve these inventory shortage. To date, there are no indications investors are ready to sell. However, they should be mindful of the fact that rental demand will soften as the overall population of young adults starts to shrink in roughly five years.
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 500,000 in May 2017.
Using this methodology, 485,000 existing home unadjusted sales were forecast for April 2017 versus the actual reported number of 449,000 (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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