July 2011 Pending Home Sales Index Suggests Wide Range of Possibilities

Econintersect uses the National Association of Realtors July 2011 Pending Home Sales Index to forecast August 2011 existing home sales. The pending home sales index for July 2011 leaves a wide range of possibilities for August 2011 existing home sales.

The actual home sale might appear in the month the contract was signed (cash buyers account for 29% of home sales), or in the following two months. Econintersect evaluates by offsetting the index one month to project existing home sales.

Pending home sales declined in July but remain well above year-ago levels, according to the National Association of Realtors®. All regions show monthly declines except for the West, which continues to show the highest level of sales contract activity.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 1.3 percent to 89.7 in July from 90.9 in June but is 14.4 percent above the 78.4 index in July 2010. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said sales activity is underperforming. “The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”

“Looking at pending home sales over a longer span, contract activity over the past three months is fairly comparable to the first three months of the year, and well above the low seen in April,” Yun said. “The underlying factors for improving sales are developing, such as rising rents, record high affordability conditions and investors buying real estate as a future inflation hedge. It is now a question of lending standards and consumers having the necessary confidence to enter the market.”

Using this index offset one month suggests existing home sales of 403,000 in August 2011.

The above graphic uses unadjusted data which is suggesting a 2.7% decline in August 2011 based on August 2010 actual home sales of 414,000. Econintersect’s methodology historically has underestimated Augusts home sales by approximately 40,000. The point here is that existing home sales could be as high as 450,000 which would be a strong 8% to 9% year-over-year improvement – instead of the 2.7% decline.

Please note that the NAR has been claiming significant contract cancellation percentages in past months – however, the correlations between the pending home sales index and actual data is not confirming this.

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.

With the first time home buyers stimulus effected data out of the way of year-over-year comparisons, August 2011 will be the second month of real comparable data for existing home sales to have a true gauge of the health of real estate. July 2011 existing home sales showed moderate year-over-year improvements.

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