August 2017 Pending Home Sales Seasonally Adjusted Index In Contraction

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index again declined. Our analysis agrees. The quote of the day from this NAR release:

…many would-be buyers from earlier in the year are still in the market for a home, while others have perhaps decided to temporarily postpone their search …

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 2.6 % month-over-month and down 2.6 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of -0.6 % to 1.2 % (consensus -0.1 %) versus the negative -2.6 % reported.

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was down 2.6 % month-over-month and down 3.1 % year-over-year.
• The current trend (using 3 month rolling averages) is declining..
• Extrapolating the pending home sales unadjusted data to project September 2017 existing home sales would be down 3.2 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

…. this summer’s terribly low supply levels have officially drained all of the housing market’s momentum over the past year. August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes. Demand continues to overwhelm supply in most of the country, and as a result, many would-be buyers from earlier in the year are still in the market for a home, while others have perhaps decided to temporarily postpone their search.

With little relief expected from the housing shortages that continue to plague several areas, Yun believes the housing market has essentially stalled. Further complicating any sales improvement in the months ahead is the fact that Hurricane Harvey’s damage to the Houston region contributed to the South’s decline in contract signings in August, and will likely continue to do so in the months ahead. Furthermore, the temporary pause in activity in Florida this month in the wake of Hurricane Irma will slow overall sales even more in the South.

Yun now forecasts existing-home sales to close out the year at around 5.44 million, which comes in slightly below (0.2 percent) the pace set in 2016 (5.45 million). The national median existing-home price this year is expected to increase around 6 percent. In 2016, existing sales increased 3.8 percent and prices rose 5.1 percent.

“The supply and affordability headwinds would have likely held sales growth just a tad above last year, but coupled with the temporary effects from Hurricanes Harvey and Irma, sales in 2017 now appear will fall slightly below last year,” said Yun. “The good news is that nearly all of the missed closings for the remainder of the year will likely show up in 2018, with existing sales forecast to rise 6.9 percent.”

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 470,000 in September 2017.

Using this methodology, 505,000 existing home unadjusted sales were forecast for July 2017 versus the actual reported number of 535,000 (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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