March 2018 Pending Home Sales Seasonally Adjusted Index Remains In Contraction Year-over-Year

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved. Our analysis says pending home sales is in contraction year-over-year. The quote of the day from this NAR release:

… What continues to hold back sales is the fact that prospective buyers are increasingly having difficulty finding an affordable home to buy. …

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 improved 0.4 % month-over-month and down 3.0 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of 0.5 % to 1.8 % (consensus +1.0 %).

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was up 0.3 % month-over-month and down 4.4 % 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 April 2018 existing home sales would be down 1.7 % year-over-year for existing home sales.

From Lawrence Yun , NAR chief economist:

…. contract activity is moving sideways and not breaking higher despite the strong job-creating economy. Healthy economic conditions are creating considerable demand for purchasing a home, but not all buyers are able to sign contracts because of the lack of choices in inventory,” he said. “Steady price growth and the swift pace listings are coming off the market are proof that more supply is needed to fully satisfy demand1. What continues to hold back sales is the fact that prospective buyers are increasingly having difficulty finding an affordable home to buy.

As anticipated, the multiple winter storms and unseasonably cold weather contributed to the decrease in contract signings in the Northeast.

Much of the country is enjoying a thriving job market, but buying a home is becoming more expensive,. That is why it is an absolute necessity for there to be a large increase in new and existing homes available for sale in coming months to moderate home price growth. Otherwise, sales will remain stuck in this holding pattern and a growing share of would-be buyers — especially first-time buyers — will be left on the sidelines.

Yun forecasts for existing-home sales in 2018 to be around 5.61 million — up from 5.51 million in 2017. The national median existing-home price is expected to increase around 4.4 percent. In 2017, existing sales increased 1.1 percent and prices rose 5.8 percent.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 440,000 in April 2018.

Using this methodology, 410,000 existing home unadjusted sales were forecast in March 2018 versus the actual reported number of 434,000 (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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