May 2018 Pending Home Sales Seasonally Adjusted Index Remains In Contraction Year-Over-Year

The National Association of Realtors (NAR) seasonally adjusted pending home sales index declined. Our analysis shows pending home sales is in contraction year-over-year. The quote of the day from this NAR release:

... Realtors in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled

Analyst Opinion of Pending Home Sales

The rolling averages remain 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, and the long term trends continue to be generally 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 declined 0.5 % month-over-month and down 2.2 % year-over-year.
• The market [from Nasdaq / Econoday} was expecting month-over-month growth of -0.5 % to 2.0 % (consensus +0.7 %).

Econintersect's evaluation using unadjusted data:

• the index growth rate decelerated 3.1 % month-over-month and down 2.8 % year-over-year.
• The current trend (using 3 month rolling averages) is accelerating but in contraction.
• Extrapolating the pending home sales unadjusted data to project June 2018 existing home sales would be down 4.0 % year-over-year for existing home sales.

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From Lawrence Yun , NAR chief economist:

.... this year's spring buying season will go down as one of unmet expectations. Pending home sales underperformed once again in May, declining for the second straight month and coming in at the second lowest level over the past year. Realtors® in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled.

The lackluster spring has primarily been a supply issue, and not one of weakening demand. If the recent slowdown in activity were because buyer interest is waning, price growth would start slowing, inventory would begin rising and homes would stay on the market longer. Instead, the underlying closing data in May showed that home price gains are still outpacing income growth, inventory declined on an annual basis for the 36th consecutive month, and listings typically went under contract in just over three weeks1.

With the cost of buying a home getting more expensive, it's clear the summer months will be a true test for the housing market. One encouraging sign has been the increase in new home construction to a 10-year high. Several would-be buyers this spring were kept out of the market because of supply and affordability constraints. The healthy economy and job market should keep many of them actively looking to buy, and any rise in inventory would certainly help them find a home.

Yun forecasts for existing-home sales in 2018 to decrease 0.4 percent to 5.49 million - down from 5.51 million in 2017. The national median existing-home price is expected to increase around 5.0 percent. In 2017, existing sales increased 1.1 percent and prices rose 5.7 percent.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 575,000 in June 2018.

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Using this methodology, 510,000 existing home unadjusted sales were forecast in May 2018 versus the actual reported number of 536,000 (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).