October 2019 Pending Home Sales Declines

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis shows the year-over-year rate of growth slowed but still was relatively good. The quote of the day from this NAR release:

… There is no shortage of buyers seeking homes, but a lack of available units continues to drag down the nation’s housing market and overall economy …

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 1.7 % month-over-month and up 4.4 % year-over-year (originally reported up 3.9 % last month).
• The market [from Econoday} was expecting month-over-month growth of —-to —– (consensus —- %).

Econintersect‘s evaluation using unadjusted data:

• the index growth rate was down 2.4 % month-over-month and up 3.8 % year-over-year.
• The current trend (using 3-month rolling averages) is accelerating
• Extrapolating the pending home sales unadjusted data to project Novemer 2019 existing home sales would be down 4.5 % year-over-year for existing home sales.

From Lawrence Yun, the NAR chief economist:

The decline in inventory and a small rise in mortgage rates in October from September to, in part, explain this month’s signings drop. While contract signings have decreased, the overall economic landscape remains favorable,” Yun said. “Mortgage rates continue to be low at below 4% – which will attract buyers – employment levels are strong and many recession claims have dissipated.

Pointing to data from active listings at realtor.com®, the markets where listing prices are around $250,000 – an affordable price point in most markets nationally – are drawing some of the most significant buyer attention, including Fort Wayne, Ind., Pueblo, Colo., Columbus, Ohio, Rochester, N.Y., and Lafayette, Ind.

We still need to address and, more importantly, correct inadequate levels of inventory across the country. There is no shortage of buyers seeking homes, but a lack of available units continues to drag down the nation’s housing market and overall economy.”

We risk a lingering shortage of sufficient inventory if homebuilding only continues at its current pace over the next 20 years, when the U.S. population is projected to increase by more than 40 million over this period. Clearly, home builders must step in and construct more 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 420,000 in November 2019.

Using this methodology, 450,000 existing home unadjusted sales were forecast for October 2019 versus the actual reported number of 463,000 (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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