Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index slowed. Our analysis shows significant growth this month as the data is being compared to the lockdown one year ago.
Analyst Opinion of Pending Home Sales
The existing home inventory remains too low to support any acceleration of growth. – and home prices increases are pricing many out of the market. This is a long term problem.
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 4.4 % month-over-month and up 51.7% year-over-year as it is being compared to the recession one year ago
- The market [from Econoday] was expecting month-over-month growth of 0.8 % to 5.0 % (consensus 2.0 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate accelerated 28.5 % month-over-month with year-over-year growth is up 53.5 % [growth surge due to comparisons to lockdown period]
- The current trend (using 3-month rolling averages) is accelerating
- Extrapolating the pending home sales unadjusted data to project April 2021 existing home sales would be up 46 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes. The upper-end market is still moving sharply as inventory is more plentiful there.
Housing supply is anticipated to improve as a whole as soon as autumn. There is an increase in the comfortability of those listing, as well as a rise in sellers after the conclusion of the eviction moratorium or as they exit forbearance.
The Midwest region, which has the most affordable homes, was the only region to notch a gain in the latest month. Some buyers from the expensive cities in the West and Northeast, who have the flexibility to move and work from anywhere, could be opting for a larger-sized home at a lower price in the Midwest.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index by one month. This forecast suggests unadjusted existing home sales of 540,000 in May 2021
Using this methodology, 480,000 existing home unadjusted sales were forecast for April 2021 versus the actual reported number of 513,000 (which is subject to further revision).
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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