Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index remains in contraction and declined. Our analysis is significantly better. The quote of the day from this NAR release:
… The supply of inventory for homes priced under $250,000 stood at 3.3 months in April, and homes priced $1 million and above recorded an inventory of 8.9 months in April. …
Analyst Opinion of Pending Home Sales
For the unadjusted data, the 3-month rolling averages remain in negative territory but the year-over-year growth for April was in positive territory for the first time in a year. The data is very noisy and must be averaged to make sense of the situation. Shorter term trends are now improving. Note that the long-term downward trend of home sales began in mid-2015.
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 1.5 % month-over-month and down 2.0 % year-over-year (originally reported down 1.2 % last month).
- The market [from Econoday} was expecting month-over-month growth of -1.8 % to 1.1 % (consensus +0.3 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 3.5 % month-over-month and up 0.4 % year-over-year.
- The current trend (using 3-month rolling averages) is accelerating and marginally in expansion
- Extrapolating the pending home sales unadjusted data to project May 2019 existing home sales would be down 0.7 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
…. sales dip has yet to account for some of the more favorable trends toward homeownership, such as lower mortgage rates. Though the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising,” he said. “It’s inevitable for sales to turn higher in a few months.
Home price appreciation has been the strongest on the lower-end as inventory conditions have been consistently tight on homes priced under $250,000. Price conditions are soft on the upper-end, especially in high tax states like Connecticut, New York and Illinois. The supply of inventory for homes priced under $250,000 stood at 3.3 months in April, and homes priced $1 million and above recorded an inventory of 8.9 months in April.
The year-over-year increases could be a sign of a rise in inventory. San Jose-Sunnyvale-Santa Clara, Calif., Seattle-Tacoma-Bellevue, Wash., San Francisco-Oakland-Hayward, Calif., Portland-Vancouver-Hillsboro, Ore.-Wash., and Nashville-Davidson-Murfreesboro-Franklin, Tenn., saw the largest increase in active listings in April compared to a year ago.
We are seeing migration to more affordable regions, particularly in the South, where there has been recent job growth and homes are more affordable.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 530,000 in May 2019.
Using this methodology, 430,000 existing home unadjusted sales were forecast in April 2019 versus the actual reported number of 455,000 (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 can speed 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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