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:
… The combination of paying extra at the pump, while also needing to save more for a down payment because of higher rates and home prices, may weigh on the psyche of those looking 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 declined 1.3 % month-over-month and down 2.1 % year-over-year.
- The market [from Bloomberg / Econoday} was expecting month-over-month growth of 0.3 % to 1.0 % (consensus +0.7 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 4.7 % month-over-month and up 0.4 % year-over-year.
- The current trend (using 3 month rolling averages) is accelerating but in contraction.
- Extrapolating the pending home sales unadjusted data to project May 2018 existing home sales would be down8.2 % year-over-year for existing home sales.
From Lawrence Yun , NAR chief economist:
…. the housing market this spring is hindered because of the severe housing shortages in much of the country. Pending sales slipped in April and continued to stay within the same narrow range with little signs of breaking out. Feedback from Realtors®, as well as the underlying sales data, reveal that the demand for buying a home is very robust. Listings are typically going under contract in under a month, and instances of multiple offers are increasingly common and pushing prices higher.
The unfortunate reality for many home shoppers is that reaching the market will remain challenging if supply stays at these dire levels.
The combination of paying extra at the pump, while also needing to save more for a down payment because of higher rates and home prices, may weigh on the psyche of those looking to buy. For now, the economy is very healthy, job growth is holding steady and wages are slowly rising. However, it all comes down to overall supply. If more new and existing homes are listed for sale, it would allow home prices to moderate enough to stave off inflationary pressures and higher rates.
Yun still forecasts for existing-home sales in 2018 to increase 0.5 percent to 5.54 million – up from 5.51 million in 2017. The national median existing-home price is expected to increase around 5.1 percent. In 2017, existing sales increased 1.1 percent and prices rose 5.7 percent.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 510,000 in May 2018.
Using this methodology, 440,000 existing home unadjusted sales were forecast in April 2018 versus the actual reported number of 460,000 (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).