Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index had a record recovery from coronavirus shutdown – but the index remains in contraction. The quote of the day from this NAR release:
The outlook has significantly improved, as new home sales are expected to be higher this year than last, and annual existing-home sales are now projected to be down by less than 10% – even after missing the spring buying season due to the pandemic lockdown.
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 slow after this initial recovery.
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 rose 44.3 % month-over-month and declined 5.1 % year-over-year
- The market [from Econoday] was expecting month-over-month growth of 6.8 % to 25.0 % (consensus +11.3 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 24.3 % month-over-month with year-over-year growth down 10.4 %.
- 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 4.0 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership. This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.
More listings are continuously appearing as the economy reopens, helping with inventory choices. Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.
The outlook has significantly improved, as new home sales are expected to be higher this year than last, and annual existing-home sales are now projected to be down by less than 10% – even after missing the spring buying season due to the pandemic lockdown.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 505,000 in June.
Using this methodology, 370,000 existing home unadjusted sales were forecast for May 2020 versus the actual reported number of 372,000 (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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