August 2011 Pending Home Sales Continues to Show Improving Volumes

The National Association of Realtors (NAR) pending home sales index offers a window into predicting September existing home sales – and ignoring monthly gyrations, home sales volumes are trending up.

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.  From the NAR press release:

Pending home sales slipped in August with a mixed regional performance but are higher than a year ago, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 1.2 percent to 88.6 in August from 89.7 in July but is 7.7 percent above August 2010 when it stood at 82.3. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said the decline reflects an uneven market. “The biggest monthly decline was in the Northeast, which was significantly disrupted by Hurricane Irene in the closing weekend of August,” he said. “But broadly speaking, contract signing activity has been holding in a narrow range for many months.”

Using this index offset one month suggests existing home sales of 440,000 in September 2011.

Econintersect’s methodology produced a huge miss on the August home sales which came in at 502,000 versus the forecasted 450,000.   Historically, this method of forecasting is accurate for September sales.

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, September 2011 will be the third month of real comparable data for existing home sales to have a true gauge of the health of real estate.  The abnormal dip in sales in the months following the end of the spring 2010 home buyers’ tax incentive should be at or near an end. This dip may have produced artificially good year-over-year comparisons in recent months.  Recognizing that caveat, the trendline since the end of the stimulus shows positive real estate sales growth.

Keeping things real – home sales volumes are only 75% of previous peaks.

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