Pending Home Sales: Down but Meaning in Doubt

Econintersect uses the National Association of Realtors (NAR) pending home sales index to forecast the next months pending home sales.  According to the NAR, in January 2011:

Pending home sales eased moderately in January for the second straight month, but remain 20.6 percent above the cyclical low last June.

The Pending Home Sales Index, a forward-looking indicator, declined 2.8 percent to 88.9 based on contracts signed in January from a downwardly revised 91.5 in December. The index is 1.5 percent below the 90.3 level in January 2010 when a tax credit stimulus was in place. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

The NAR seasonally adjusts their headline data.  Econintersect uses their raw data which shows pending home sales are down 4.4% YoY, not 1.5% as the seasonally adjusted data implies.  The graph below uses a one month offset on the pending home sales data, and graphs it against the unadjusted NAR home sales data.

Based on Econintersect’s analysis, Existing home sales in February 2011 should come in at 305,000 – a 2% increase over 201o.  Curious minds might ask how can the pending index be down 4.4%, yet Econintersect is projecting a YoY gain in existing home sales.

In February 2010, Econintersect would have predicted home sales of almost 320,000 – while home sales came in at 300,000.  A year ago, the index predicted higher home sales then what actually occurred.

For January pending home sales, Econintersect predicted 260,000 while the actual came in at 284,000 – a difference of 9% (analysis here).

This index is influenced by the speed at which closings occur.  When they slow down in a particular period – the index overestimates.  Right now, the number of cash buyers are speeding up the process – and the index may be under-forecasting (cash buyers analysis here).

A quick cash home sale process could begin and end in the same month.

In January 2010 existing home sales have increased YoY (analysis here) – one month is not a trend.  But with the sellers willing to drop prices, and more investors bringing cash to the table – this might be the beginning of a higher home sales trend.

Increasing the volume of existing home sales will start the process of putting a bottom under home prices (analysis of home price indexes here).

Econintersect is not as bullish as the NAR who as industry cheerleaders have a track record of over-spinning the data:

Lawrence Yun, NAR chief economist, points to the broader trend. “The housing market is healing with sales fluctuating at times, depending on the flow of distressed properties coming on the market,” he said.

“While home buyers over the past two years have been exceptionally successful with historically low default rates, there is still an elevated level of shadow inventory of distressed homes from past lending mistakes that need to go through the system,” Yun said. “We should not expect the recovery to be in a straight upward path – it will zig-zag at times.”

The pace of January existing-home sales, 5.36 million, is slightly higher than NAR’s annual forecast for 2011. If contract activity stays on its present course, there should be an 8 percent increase in total existing-home sales this year.

“The broad fundamentals for a housing recovery are developing,” Yun said. “Job growth, high housing affordability and rising apartment rent are conducive to bringing more buyers into the market. Some buyers may be looking to real estate as a hedge against potential future inflation.”