May 2019 Pending Home Sales Improves?

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

... lower-than-usual mortgage rates have led to the increase in pending sales for May

Analyst Opinion of Pending Home Sales

For the unadjusted data, the 3-month rolling averages remain in negative territory and the year-over-year growth for May was also in negative territory. The data is very noisy and must be averaged to make sense of the situation. Shorter term trends are now improving. Note that the long-term downward trend of home sales began in mid-2015.

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 1.1 % month-over-month and down 0.7 % year-over-year (originally reported down 1.5 % last month).
• The market [from Econoday} was expecting month-over-month growth of -0.1 % to 0.6 % (consensus +0.6 %).

Econintersect's evaluation using unadjusted data:

• the index growth rate decelerated 1.2 % month-over-month and down 0.1 % year-over-year.
• The current trend (using 3-month rolling averages) is accelerating and marginally in expansion
• Extrapolating the pending home sales unadjusted data to project June 2019 existing home sales would be up 0.2 % year-over-year for existing home sales.

(Click on image to enlarge)

From Lawrence Yun, the NAR chief economist:

.... lower-than-usual mortgage rates have led to the increase in pending sales for May. Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers. Buyers, for good reason, are anxious to purchase and lock in at these rates.

Consumer confidence about home buying has risen, and expects more activity in the coming months. The Federal Reserve may cut interest rates one more time this year, but there is no guarantee mortgage rates will fall from these already historically low points. Job creation and a rise in inventory will nonetheless drive more buyers to enter the market.

Citing the hottest housing markets from data at realtor.com®, the year-over-year increases could be a sign of a rise in inventory. Rochester, N.Y., Fort Wayne, Ind., Lafayette-West Lafayette, Ind., Boston-Cambridge-Newton, Mass., and Midland, Texas, were the hottest housing markets in May.

While contract signings and mortgage applications have increased, there is still a great need for more inventory. Home builders have not ramped up construction to the extent that is needed. Homes are selling swiftly, and more construction will help keep home prices manageable and thereby allow more middle-class families to attain ownership opportunities.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 570,000 in June 2019.

(Click on image to enlarge)

Using this methodology, 530,000 existing home unadjusted sales were forecast in May 2019 versus the actual reported number of 540,000 (which is subject to further revision).

(Click on image to enlarge)

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 can speed 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).