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 rate improved. The quote of the day from this NAR release:
… The data does not capture the significant fallout from the pandemic or the measures taken to control the outbreak …
Analyst Opinion of Pending Home Sales
The year-over-year growth is in positive territory. The data is very noisy and must be averaged to make sense of the situation. Shorter-term trends are now improving. However, we expect the pending home sales index to collapse with the March data.
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 improved 2.4 % month-over-month and up 9.4 % year-over-year (originally reported up 5.7 % last month).
- The market [from Econoday] was expecting month-over-month growth of -2.5 % to 5.0 % (consensus -1.6 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 4.7 % month-over-month and up 11.5 % year-over-year.
- The current trend (using 3-month rolling averages) is accelerating
- Extrapolating the pending home sales unadjusted data to project March 2020 existing home sales would be up 12.8 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
February’s pending sales figures show the housing market had been very healthy prior to the coronavirus-induced shutdown. The data does not capture the significant fallout from the pandemic or the measures taken to control the outbreak. Numbers in the coming weeks will show just how hard the housing market was hit, but I am optimistic that the upcoming stimulus package will lessen the economic damage and we may get a V-shaped robust recovery later in the year.”
Naturally there will be a lengthier stay of inventory in the market from reduced short-term demand, citing data from active listings at realtor.com® that show year-over-year increases. Markets drawing some of the most significant buyer attention include Colorado Springs, Colo.; Lafayette, Ind.; Modesto, Calif.; Rochester, N.Y.; and Sacramento, Calif.
Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals. Many of the home sales that are likely to be missed during the first part of 2020 may simply be pushed into late summer and autumn parts of the year.”
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 450,000 in March 2020
Using this methodology, 330,000 existing home unadjusted sales were forecast for February 2020 versus the actual reported number of 335,000 (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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