December 2019 Pending Home Sales Growth Slows

Written by Steven Hansen

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

… Due to the shortage of affordable homes, home sales growth will only rise by around 3% [in 2020] …

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 slid 4.9 % month-over-month and up 4.6 % year-over-year (originally reported up 4.4 % last month).
• The market [from Econoday} was expecting month-over-month growth of 0.0 % to 1.0 % (consensus 0.4 %).

Econintersect‘s evaluation using unadjusted data:

• the index growth rate accelerated 0.0 % month-over-month and up 5.4 % year-over-year.
• The current trend (using 3-month rolling averages) is accelerating
• Extrapolating the pending home sales unadjusted data to project January 2020 existing home sales would be up 6.5 % year-over-year for existing home sales.

From Lawrence Yun, the NAR chief economist:

Mortgage rates are expected to hold under 4% for most of 2020, while net job creation will likely exceed two million. While he noted that these factors are promising for the housing market, Yun cautioned that low inventory remains a significant longer-term concern.

Due to the shortage of affordable homes, home sales growth will only rise by around 3%. Still, national median home price growth is in no danger of falling due to inventory shortages and will rise by 4%. The new home construction market also looks brighter, with housing starts and new home sales set to rise 6% and 10%, respectively.

The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market. Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 305,000 in January 2020

Using this methodology, 420,000 existing home unadjusted sales were forecast for December 2019 versus the actual reported number of 434,000 (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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