September 2019 Pending Home Sales Improves

Written by Steven Hansen

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

… Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates …

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 grew 1.5 % month-over-month and up 3.9 % year-over-year (originally reported up 2.5 % last month).
• The market [from Econoday} was expecting month-over-month growth of -0.8 % to +0.8 % (consensus -0.2 %).

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was up 5.3 % month-over-month and up 6.2 % 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 2.2 % year-over-year for existing home sales.

From Lawrence Yun, the NAR chief economist:

Historically low mortgage rates played a significant role in the two straight months of gains. Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates. Furthermore, we’ve seen increased foot traffic as more buyers are evidently eager searching to become homeowners.

Pointing to data from active listings at realtor.com, the upper end of the market is faring well. Fort Wayne, Ind., Rochester, N.Y., Pueblo, Colo., Columbus, Ohio, and Topeka, Kan., saw the largest increase in active listings in September compared to a year ago.

Although contract signings are on the upswing, the numbers would be even greater if more housing were available. Going forward, interest rates will surely not decline in a sizable way, so the changes in the median price will be the key to housing affordability,” he said. “But home prices are rising too fast because of insufficient inventory.

In addition to boosting traditional home building, we should explore a greater utilization of modular factory constructed homes, converting old shopping malls or vacant office space into condominiums, permitting more accessory dwelling units, and other supply-increasing actions, in order to meet the rising demand for new housing.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 455,000 in October 2019.

Using this methodology, 450,000 existing home unadjusted sales were forecast for September 2019 versus the actual reported number of 452,000 (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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