November 2017 Pending Home Sales Seasonally Adjusted Index Rose Marginally

The National Association of Realtors (NAR) seasonally adjusted pending home sales index rose marginally. The quote of the day from this NAR release:

... Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas ...

Analyst Opinion of Pending Home Sales

The rolling averages continue 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 are now upward. I personally do not believe the new tax laws will affect home sales next year as most people do not consider income tax savings when buying a home.

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 rose 0.2 % month-over-month and up 0.8 % year-over-year.
• The market [from Bloomberg / Econoday} was expecting month-over-month growth of -1.0 to 5.0 % (consensus +0.6 %) versus the +0.2 % reported.

Econintersect's evaluation using unadjusted data:

• the index growth rate was down 0.5 % month-over-month but up 0.6 % year-over-year.
• The current trend (using 3 month rolling averages) is improving but in contraction.
• Extrapolating the pending home sales unadjusted data to project December 2017 existing home sales would be up 0.3 % year-over-year for existing home sales.

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From Lawrence Yun , NAR chief economist:

.... contract signings mustered a small gain in November and were up annually for the first time since June. The housing market is closing the year on a stronger note than earlier this summer, backed by solid job creation and an economy that has kicked into a higher gear. However, new buyers coming into the market are finding out quickly that their options are limited and competition is robust. Realtors® say many would-be buyers from earlier this year, stifled by tight supply and higher prices, are still trying to buy a home.

One of the biggest questions heading into 2018 is if the depressed levels of available supply can improve enough to slow price growth and make buying a home more affordable. While last month's significant boost in existing saleswas noteworthy, it did come with some concerns. Sales prices were up 5.8 percent - more than double wage growth - and the 3.4-month supply of homes on the market was the lowest since NAR began tracking in 1999.

The strengthening economy, and expectation that more millennials will want to buy, serve as promising signs for solid homebuying demand next year, while also putting additional pressure on inventory levels and affordability. Sales do have room for growth in most areas, but nationally, overall activity could be slightly negative. Markets with high home prices and property taxes will likely feel some impact from the reduced tax benefits of owning a home.

Forecasts for existing-home sales to finish 2017 at around 5.54 million, which is an increase of 1.7 percent from 2016 (5.45 million). The national median existing-home price this year is expected to increase around 6 percent. In 2018, Yun anticipates essentially no change (a decline of 0.4 percent) in existing sales (5.52 million), and price growth to moderate to around 2 percent.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 440,000 in December 2017.

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Using this methodology, 380,000 existing home unadjusted sales were forecast in November 2017 versus the actual reported number of 427,000 (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).