Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined and the year-over-year growth returned to contraction. Our analysis shows the year-over-year rate of growth improved. The quote of the day from this NAR release:
… Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes …
Analyst Opinion of Pending Home Sales
For the unadjusted data, the 3-month rolling averages remain in negative territory and the year-over-year growth for July returned to positive territory. 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 2.5 % month-over-month and down 0.3 % year-over-year (originally reported up 1.6 % last month).
- The market [from Econoday} was expecting month-over-month growth of -1.0 % to +0.5 % (consensus -0.3 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate was up 2.3 % month-over-month and up 1.7 % year-over-year.
- The current trend (using 3-month rolling averages) is accelerating
- Extrapolating the pending home sales unadjusted data to project August 2019 existing home sales would be up 0.6 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
…. Super-low mortgage rates have not yet consistently pulled buyers back into the market. Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.
Yun expects GDP growth to ease to 2.0% in 2019 and 1.6% in 2020, but growth predictions are somewhat uncertain due to trade tensions. With slower economic growth, interest rates will remain low. Though home sales will get a short term boost from lower mortgage rates, existing-home sales are likely to be flat at 5.34 million in 2019 given the level of sales in the first seven months of the year. Amid tight inventory conditions, the median price of existing-home sales will continue increasing, but at a slower pace of 4% in 2019, to $269,000, and 3% in 2020, to $278,500.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 540,000 in August 2019.
Using this methodology, 500,000 existing home unadjusted sales were forecast for July 2019 versus the actual reported number of 540,000 (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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