Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis also shows an insignificant slowing this month. The quote of the day from this NAR release:
… The combination of these factors – scarce housing and low rates – plus very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers
Analyst Opinion of Pending Home Sales
So far, the recovery is well beyond my expectations of a lackluster recovery. It is almost like the pandemic never happened. However, the inventory remains too low to support much further acceleration of growth.
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 1.1 % month-over-month and up 20.2 % year-over-year
- The market [from Econoday] was expecting month-over-month growth of 1.0 % to 3.9 % (consensus +2.0 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate decelerated 2.7 % month-over-month with year-over-year growth up 19.5 %.
- The current trend (using 3-month rolling averages) is accelerating
- Extrapolating the pending home sales unadjusted data to project November 2020 existing home sales would be up 20.7 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
Pending home transactions saw a small drop off from the prior month but still easily outperformed last year’s numbers for October. The housing market is still hot, but we may be starting to see rising home prices hurting affordability.
Both the inventory of homes for sale and mortgage rates are now at historic lows.
The combination of these factors – scarce housing and low rates – plus very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers, who don’t have the luxury of using housing equity from a sale to use as a down payment. Work-from-home flexibility has also increased the demand for both primary and secondary homes.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 495,000 in November
Using this methodology, 545,000 existing home unadjusted sales were forecast for October 2020 versus the actual reported number of 573,000 (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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