September 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 was unchanged. Our analysis says it declined. The quote of the day from this NAR release:

…the quest to buy a home this fall continues to be a challenging endeavor for many home shoppers …

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 unchanged month-over-month and down 3.5 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of -1.9 % to 1.9 % (consensus +0.5 %) versus the 0.0 % reported.

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was down 2.0 % month-over-month and down 5.4 % 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 2.7 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

…. the quest to buy a home this fall continues to be a challenging endeavor for many home shoppers. Demand exceeds supply in most markets, which is keeping price growth high and essentially eliminating any savings buyers would realize from the decline in mortgage rates from earlier this year,. While most of the country, except for the South, did see minor gains in contract signings last month, activity is falling further behind last year’s pace because new listings aren’t keeping up with what’s being sold.

Hurricane Irma’s direct hit on Florida weighed on activity in the South, but similar to how Houston has rebounded after Hurricane Harvey, Florida’s strong job and population growth should guide sales back to their pre-storm pace fairly quickly. As has been the case most of the year, Yun says the ongoing supply constraints continue to squeeze prospective buyers the most at the lower end of the market. Last month, first-time buyers were 29 percent of all transactions, which matched the lowest share in exactly two years1. Furthermore, existing sales were down notably on an annual basis in the price range below $250,000, but up solidly the higher up the price bracke.

Buyers looking for a little relief from the stiff competition from over the summer may unfortunately be out of luck in the coming months,” said Yun. “Inventory starts to decline heading into the winter, and many would-be buyers from earlier in the year are still on the hunt to find a home.

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, 470,000 existing home unadjusted sales were forecast in September 2017 versus the actual reported number of 430,000 (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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