April 2016 Pending Home Sales Index Improves

The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved significantly - and reached their highest level in over a decade. Our analysis of pending home sales is not as positive as the NAR's, but we are forecasting relatively good May home sales. The quote of the day from this NAR release:

... even if rates rise soon, sales have legs for further expansion this summer if housing supply increases enough to give buyers an adequate number of affordable choices during their search ...

Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).

The NAR reported:

• Pending home sales index was up 5.1 % month-over-month and up 4.6 % year-over-year.
• The market was expecting month-over-month growth of 0.0 % to 1.2 % (consensus 0.8 %) versus the growth of 5.1 % reported.

Econintersect's evaluation using unadjusted data:

• the index growth was down 0.3 % month-over-month and up 2.9 % year-over-year (same as last month).
• The current trends (using 3 month rolling averages) are improving and remains in expansion.
• Extrapolating the pending home sales unadjusted data to project May 2016 existing home sales, this would be a 10.5 % expansion year-over-year for existing home sales.

Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)

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From Lawrence Yun , NAR chief economist:

.... vast gains in the South and West propelled pending sales in April to their highest level since February 2006 (117.4). The ability to sign a contract on a home is slightly exceeding expectations this spring even with the affordability stresses and inventory squeezes affecting buyers in a number of markets. The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market.

Even if rates rise soon, sales have legs for further expansion this summer if housing supply increases enough to give buyers an adequate number of affordable choices during their search.

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 can close quickly), or in the following two months.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 545,000 in May 2016.

Using Pending Home Sales to Predict Existing Homes Sales - Unadjusted Existing Home Sales (blue line) & Predictive Forecast Using Pending Home Sales Index (red line)

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Using this methodology, 495,000 existing home unadjusted sales were forecast for April 2016 versus the actual reported number of 471,000 (which is subject to further revision).

Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line), 3 month rolling average (red line)

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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).