Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index continued its slump due to coronavirus shutdown. Our analysis shows the year-over-year rate of growth rate significantly declined. The quote of the day from this NAR release:
Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded.
Analyst Opinion of Pending Home Sales
The year-over-year growth is in NEGATIVE territory. I believe the housing industry will reset due to the coronavirus – and I suspect housing will slump until a permanent fix for the pandemic is realized.
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 21.8 % month-over-month and declined 33.8 % year-over-year (originally reported down 16.3 % last month).
- The market [from Econoday] was expecting month-over-month growth of -16.4 % to -15.0 % (consensus -15.5 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate decelerated 20.1 % month-over-month and down 34.6 % year-over-year.
- The current trend (using 3-month rolling averages) is decelerating
- Extrapolating the pending home sales unadjusted data to project May 2020 existing home sales would be down 30.1 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
With nearly all states under stay-at-home orders in April, it is no surprise to see the markedly reduced activity in signing contracts for home purchases.
The latest pending home sales numbers reveal the greatest decline since NAR begin tracking such transactions in January 2001. However, April will be the lowest point for pending contracts, and the month of May, consequently, will be the lowest point for closed sales.
While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory. In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures.
Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%. In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 375,000 in May
Using this methodology, 370,000 existing home unadjusted sales were forecast for April 2020 versus the actual reported number of 373,000 (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).
include(“/home/aleta/public_html/files/ad_openx.htm”); ?>
