January 2018 Pending Home Sales Seasonally Adjusted Index At Lowest Level in 3 Years

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index fell significantly. Our analysis says pending home sales are in contraction. The quote of the day from this NAR release:

… With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment ….

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 declined 4.7 % month-over-month and down 3.8 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of -0.2 % to 0.8 % (consensus +0.5 %) versus the -4.7 % reported.

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was down 0.1 % month-over-month and down 1.7 % year-over-year.
• The current trend (using 3 month rolling averages) is decelerating and in contraction.
• Extrapolating the pending home sales unadjusted data to project February 2018 existing home sales would be down 2.6 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

…. pending sales took a noticeable step back to start 2018. The economy is in great shape, most local job markets are very strong and incomes are slowly rising, but there’s little doubt last month’s retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates. The lower end of the market continues to feel the brunt of these supply and affordability impediments. With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment.

Even though contract signings were down, Realtors® indicated that buyer traffic in most areas was up January compared to a year ago. The exception was likely in the Northeast, where the frigid cold snap the first two weeks of the month may have contributed some to the region’s large decline.

As new multi-family supply catches up with demand and slows rents, some large investors may begin putting their holdings of affordable single-family homes up for sale, which would be great news, particularly for first-time buyers. Furthermore, sellers last year typically stayed in their home for 10 years before selling (an all-time high); although higher mortgage rates will likely discourage some homeowners from wanting a new home with a higher rate, there are possibly many pent-up sellers who may look to finally trade-up or move down this year.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 305,000 in February 2018.

Using this methodology, 300,000 existing home unadjusted sales were forecast in January 2017 versus the actual reported number of 313,000 (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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