August 2020 Pending Home Sales Again Improves

Written by Steven Hansen

The National Association of Realtors (NAR) seasonally adjusted pending home sales index reaches a record high. The quote of the day from this NAR release:

… home sales are outperforming many pre-pandemic averages, but without matching supply, the recovery will not be sustainable.

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 8.8 % month-over-month and up 24.2 % year-over-year
• The market [from Econoday] was expecting month-over-month growth of 2.0 % to 4.0 % (consensus +3.1 %).

Econintersect‘s evaluation using unadjusted data:

• the index growth rate accelerated 5.1 % month-over-month with year-over-year growth up 20.5 %.
• The current trend (using 3-month rolling averages) is accelerating
• Extrapolating the pending home sales unadjusted data to project September 2020 existing home sales would be up 17.6 % year-over-year for existing home sales.

From Lawrence Yun, the NAR chief economist:

Tremendously low mortgage rates – below 3% – have again helped pending home sales climb in August. Additionally, the Fed intends to hold short-term fed funds rates near 0% for the foreseeable future, which should in the absence of inflationary pressure keep mortgage rates low, and that will undoubtably aid homebuyers continuing to enter the marketplace.

While I did very much expect the housing sector to be stable during the pandemic-induced economic shutdowns, I am pleasantly surprised to see the industry bounce back so strongly and so quickly.

While pending contracts are at an all-time high, that will not necessarily translate to a record number of home sales because not all contracts lead to closings and due to sampling size variations. Pending home sales are outperforming many pre-pandemic averages, but without matching supply, the recovery will not be sustainable.

Home prices are heating up fast. The low mortgage rates are allowing buyers to secure cheaper mortgages, but many may find it harder to make the required down payment.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 530,000 in September.

Using this methodology, 610,000 existing home unadjusted sales were forecast for August 2020 versus the actual reported number of 561,000 (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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