February 2018 Pending Home Sales Seasonally Adjusted Index Improves

The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved. Our analysis disagrees - and further pending home sales are in contraction year-over-year. The quote of the day from this NAR release:

.. weakening affordability and not enough inventory on the market restricted overall activity compared to a year ago ...

Analyst Opinion of Pending Home Sales

The rolling averages are in negative territory. The data is very noisy and must be averaged to make sense of the situation. There is no signs of a surge in home sales, although the trends continue to be downward.

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 improved 3.1 % month-over-month and down 4.1 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of 0.5 % to 6.0 % (consensus +2.7 %) versus the +3.1 % reported.

Econintersect's evaluation using unadjusted data:

• the index growth rate was down 2.5 % month-over-month and down 4.4 % year-over-year.
• The current trend (using 3 month rolling averages) is decelerating and in contraction.
• Extrapolating the pending home sales unadjusted data to project March 2018 existing home sales would be down 9.9 % year-over-year for existing home sales.

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From Lawrence Yun , NAR chief economist:

.... the housing market has gotten off to an uneven start so far in 2018. Contract signings rebounded in most areas in February, but the gains were not large enough to keep up with last February's level, which was the second highest in over a decade (112.1). The expanding economy and healthy job market are generating sizeable homebuyer demand, but the miniscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity.

Expect ongoing volatility in the Northeast region at least through March. Although pending sales there bounced back in February following January's cold weather-related decline, the multiple winter storms over these last few weeks likely put a chill on contract signings once again this month.

Homeowners are already staying in their homes at an all-time high before selling, and any situation where they remain put even longer only exacerbates the nation's inventory crunch. Even if new home construction starts picking up at a faster pace this year, as expected, existing sales will fail to break out if these record low supply levels do not recover enough to meet demand.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 410,000 in March 2018.

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Using this methodology, 300,000 existing home unadjusted sales were forecast in February 2018 versus the actual reported number of 319,000 (which is subject to further revision).

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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).