Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index remains in contraction and declined. The quote of the day from this NAR release:
… February’s pending home sales decline is coming off a solid gain in the prior month. In January, pending contracts were up close to 5 percent, so this month’s 1 percent drop is not a significant concern …
Analyst Opinion of Pending Home Sales
The rolling averages remain in negative territory. The data is very noisy and must be averaged to make sense of the situation. The long term trends continue to be downward. Note that the downward trend of home sales began in mid-2015 – and unlike the NAR’s optimism, we see no reason for optimism for home sales in 2019.
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 increased 1.0 % month-over-month and down 4.9 % year-over-year (originally reported down 2.3 % last month).
- The market [from Econoday} was expecting month-over-month growth of -3.0 % to 3.2 % (consensus -1.0 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate decelerated 1.7 % month-over-month and down 5.0 % 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 March 2019 existing home sales would be down 7.1 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
…. February’s pending home sales decline is coming off a solid gain in the prior month. In January, pending contracts were up close to 5 percent, so this month’s 1 percent drop is not a significant concern. As a whole, these numbers indicate that a cyclical low in sales is in the past but activity is not matching the frenzied pace of last spring.
Despite the growth in the West, the region’s current sales are well below the sales activity from 2018. There is a lack of inventory in the West and prices have risen too fast. Job creation in the West is solid, but there is still a desperate need for more home construction. Year-over-year increases in active listings from data at realtor.com® to illustrate the potential rise in inventory. Denver-Aurora-Lakewood, Colo., Seattle-Tacoma-Bellevue, Wash., San Diego-Carlsbad, Calif., Portland-Vancouver-Hillsboro, Ore.-Wash., and Nashville-Davidson-Murfreesboro-Franklin, Tenn., saw the largest increase in active listings in February compared to a year ago.
I not anticipate any interest rate increases from the Federal Reserve in 2019. If there is a change at all, I would say the Fed will lower interest rates in 2019 or 2020. That would stimulate the economy and the housing market, But the expectation is no change at all in the current monetary policy, which will help mortgage rates stay at attractive levels.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 400,000 in March 2019.
Using this methodology, 305,000 existing home unadjusted sales were forecast in February 2019 versus the actual reported number of 312,000 (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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