Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis also shows slowing this month. The quote of the day from this NAR release:
… [the] decline is largely due to the shortage of inventory and fast-rising home prices
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 2.6 % month-over-month and up 16.4 % year-over-year
- The market [from Econoday] was expecting month-over-month growth of -1.0 % to 0.7 % (consensus 0.0 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate decelerated 3.7 % month-over-month with year-over-year growth up 16.0 %.
- The current trend (using 3-month rolling averages) is decelerating
- Extrapolating the pending home sales unadjusted data to project December 2020 existing home sales would be up 7.2 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
The latest monthly decline is largely due to the shortage of inventory and fast-rising home prices. It is important to keep in mind that the current sales and prices are far stronger than a year ago.
The market is incredibly swift this winter with the listed homes going under contract on average at less than a month due to a backlog of buyers wanting to take advantage of record-low mortgage rates.
Yun predicts a favorable outlook for the housing market in the coming year. According to his 2021 projections, there will be a slight upward rise in mortgage rates to around 3% from the current 2.7% rate. Existing-home sales are expected to increase roughly 10% and new home sales by 20% next year.
Economic growth is guaranteed from the stimulus package and from vaccine distribution, but high government borrowing will put modest upward pressure on interest rates.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 465,000 in December
Using this methodology, 495,000 existing home unadjusted sales were forecast for November 2020 versus the actual reported number of 492,000 (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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