Written by Steven Hansen
The National Association of Realtors (NAR) seasonally adjusted pending home sales index rose. According to the NAR:
May’s strong increase in transactions – following April’s decline, as well as a sudden erosion in home affordability – was indeed a surprise. The housing market is attracting buyers due to the decline in mortgage rates, which fell below 3%, and from an uptick in listings.
Analyst Opinion of Pending Home Sales
The existing home inventory remains too low to support much of an 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 rose 8.0 % month-over-month and up 13.1% year-over-year.
- The market [from Econoday] was expecting month-over-month growth of -2.5 % to 1.0 % (consensus -1.0 %).
Econintersect‘s evaluation using unadjusted data:
- the index growth rate decelerated 39.7 % month-over-month with year-over-year growth is up 13.9 %
- The current trend (using 3-month rolling averages) is accelerating
- Extrapolating the pending home sales unadjusted data to project May 2021 existing home sales would be up 11 % year-over-year for existing home sales.
From Lawrence Yun, the NAR chief economist:
May’s strong increase in transactions – following April’s decline, as well as a sudden erosion in home affordability – was indeed a surprise. The housing market is attracting buyers due to the decline in mortgage rates, which fell below 3%, and from an uptick in listings.
Although there has been a series of obstacles over the last year, including an unprecedented pandemic, record-high prices and all-time low inventory, buyers are still lining up at a feverish pace.
While these hurdles have contributed to pricing out some would-be buyers, the record-high aggregate wealth in the country from the elevated stock market and rising home prices are evidently providing funds for home purchases. More market listings will appear in the second half of 2021, in part from the winding down of the federal mortgage forbearance program and from more home building.
Home price growth will steadily moderate with increased supply, but a broad and prolonged decline in prices is unlikely. However, if a reduction occurs in some markets, homebuyers will view the lower home price as a second-chance opportunity to get into the market after being outbid in previous multiple-bid market conditions.
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 June 2021
Using this methodology, 540,000 existing home unadjusted sales were forecast for May 2021 versus the actual reported number of 528,000 (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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