Pending Homes Sales Index Up 8.2% & It Is Not Yet Good News

The pending home sales index for May 2011 shows improvement – but it will be up to the reader to interpret what it means.  Econintersect’s analysis shows this falls into the good news – bad news category.

Pending home sales rose strongly in May with all regions experiencing gains from a year ago, pointing to higher housing activity in the second half of the year, according to the National Association of Realtors® (NAR).

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 8.2 percent to 88.8 in May from an upwardly revised 82.1 in April and is 13.4 percent higher than the 78.3 reading in May 2010. The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

This is the first time since April 2010 that contract activity was above year-ago levels, and the monthly gain was the strongest increase since last November when the index rose 10.6 percent.

Although Econintersect uses unadjusted data, there is no question the index is higher than it was a year ago during the dying days of the first home buyers stimulus.  The pending home sales index closely mimics the actual home sales index offset one month.  As the graph below illustrates, this means that year-over-year actual home sales will decline 20%.

Here is the opinion of the NAR:

Lawrence Yun, NAR chief economist, said the improvement bodes well for home prices. “Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace,” he said. “Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle.”

Pending home sales have trended up unevenly since bottoming last June, rising in seven of the past 11 months. “Home sales still could be 15 to 20 percent higher,” Yun said. “If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we’d get a much faster recovery in the housing sector.”

“In addition, a nonsensical situation has developed recently in some states with HUD unable to complete foreclosure deals because of insufficient funds to pay attorney fees at closing, even with buyers offering the full listing price,” Yun added.

The graph above uses a one month offset on the unadjusted pending home sales index, and graphs it against the unadjusted NAR home sales data.

Based on Econintersect’s analysis, existing home sales in June 2011 should come in at 440,000 – again a 20% decline over 2010.  Using this methodology, Econintersect projected May 2011 home sales to be 420,000 – and the actual sales came in at458,000 (analysis here).

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 are speeding 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.

There is no question a normal historical spring home sales increase is underway.  However, home sales are still down year-over-year for the data released so far this year. Combined with this data, is continuing to confirm a weaker buying season in 2011.

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