Written by Steven Hansen
The May 2013 pending home sales index was released by the National Association of Realtors (NAR) today, and our analysis suggests:
- The current trends (using 3 month rolling averages) continue to show an acceleration in pending home sales.;
- Extrapolating this data to project June home sales, this would be a 12.5% gain year-over-year in June existing home sales, and the 25th month in a row of year-over-year gains.
The NAR reported May pending home sales index up 6.7% month-over-month and up 12.1% year-over-year. The market was expecting growth of 1.5% (versus the 6.7% reported). Econintersect‘s evaluation shows the index down 0.1% month-over-month and up 12.1% year-over-year.
Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)
From Lawrence Yun , NAR chief economist:
Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher,” he said. “This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand.
Yun upgraded the price forecast for 2013, with the national median existing-home price expected to rise more than 10 percent to nearly $195,000. This would be the strongest increase since 2005 when the median increased 12.4 percent.
Existing-home sales are projected to increase 8.5 to 9.0 percent, reaching about 5.07 million in 2013, the highest in seven years; it would be slightly above the 5.03 million total recorded in 2007.
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 33% of home sales in May 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 500,000 in June 2013 (negative 50,000 fudge factor this month for historical error of this methodology for the month of Junes in years past).
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, 480,000 (no fudge factor) existing home unadjusted sales were forecast for May 2013 sales vs the actual reported number of 516,000 (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.
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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