Written by Steven Hansen
The January 2013 pending home sales index was released by the National Association of Realtors (NAR) today, and our analysis suggests:
- Econintersect‘s uses this January 2013 pending home sales data to forecast the February 2013 home sales – and our forecast for February is 310,000 (see details below);
- If this 310,000 historical correlation is correct, this would only be a 8.2% gain year-over-year in February existing home sales, and the 20th month in a row of year-over-year gains.
- Unadjusted actual January existing home sales were up 4.8% month-over-month, Up 11.9% year-over-year. The rate of growth over the last 12 months was flat – in other words the growth rate is remaining inside a channel neither accelerating or decelerating.
The NAR reported the January pending home sales index up 4.5% month-over-month and up 9.5% year-over-year, while the market was expecting 1.0% (versus the +9.5% reported). Econintersect‘s evaluation shows the index up 5.6% month-over-month and up 10.4% year-over-year,
From the NAR press release:
Pending home sales rose in January, and have been above year-ago levels for the past 21 months, according to the National Association of Realtors®. There were healthy monthly gains in all regions but the West, which is constrained by limited inventory but was slightly improved.
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 4.5 percent to 105.9 in January from a downwardly revised 101.3 in December and is 9.5 percent above January 2012 when it was 96.7. The data reflect contracts but not closings.
The January index is the highest reading since April 2010 when it hit 110.9, just before the deadline for the home buyer tax credit. Aside from spikes induced by the tax credits, the last time there was a higher reading was in February 2007 when it reached 107.9.
Lawrence Yun , NAR chief economist, said inventory is the key to this year’s housing market. “Favorable affordability conditions and job growth have unleashed a pent-up demand. Most areas are drawing down housing inventory, which has shifted the supply/demand balance to sellers in much of the country. It’s also why we’re experiencing the strongest price growth in more than seven years,” he said.
“Over the near term, rising contract activity means higher home sales, but total sales for the year are expected to rise less than in 2012, while home prices are projected to rise more strongly because of inventory shortages,” Yun said.
The National Association of Realtors (NAR) pending home sales index offers a window into predicting existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 29% of home sales in January according to the NAR), or in the following two months.
Econintersect evaluates by offsetting the index one month to project unadjusted existing home sales. Using this index offset one month suggests existing home sales of 310,000 in February 2013 (including a -15,000 fudge factor) for historical error of this methodology for the month of February in years past. Note the graph below does not include fudge factors.
Using Pending Home Sales to Predict Existing Homes Sales – Unadjusted Existing Home Sales (blue line) & Predictive Forecast Using Pending Home Sales Index (red line)
Using this methodology, 265,000 (including a +11,000 fudge factor) existing home unadjusted sales were forecast for January 2013 sales vs the actual reported number of 291,000 (which is subject to further revision).
Unadjusted Year-over-Year Change in Existing Home Sales Volumes
As shown on the above graphic, since mid 2011 home sales have been positively growing year-over-year. However, the strong rate of growth seen since mid-2010 appears to have moderated to a lower growth channel as shown on the graph above. However, October home sales were the best year-over-year growth seen in 2012, and the November data was second – while the December numbers returned to the average rate of growth for 2012.
Keeping things real – home sales volumes are only 2/3rds of previous levels.
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 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.
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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