The National Association of Realtors (NAR) seasonally adjusted pending home sales index remains in contraction year-over-year. Our analysis shows continued worsening of growth. The quote of the day from this NAR release:
... existing-home sales this year [are expected ] to decrease 3.1 percent to 5.34 million, and the national median existing-home price to increase 4.7 percent. Looking ahead to next year, existing sales are forecast to decline 0.4 percent and home prices to drop roughly 2.5 percent ...
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. 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 decreased 2.6 % month-over-month and down 6.7 % year-over-year (reported down 1.0 % last month).
- The market [from Econoday} was expecting month-over-month growth of -0.5 % to 1.0 % (consensus 0.5 %).
Econintersect's evaluation using unadjusted data:
- the index growth rate decelerated 1.3 % month-over-month and down 4.7 % 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 November 2018 existing home sales would be down 9.9 % year-over-year for existing home sales.
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From Lawrence Yun, the NAR chief economist:
.... ten straight months of decline certainly isn't favorable news for the housing sector. The recent rise in mortgage rates have reduced the pool of eligible homebuyer.
.... a similar period of decline occurred during the 2013 Taper Tantrum when interest rates jumped from 3.5 percent to 4.5 percent. After 11 months - November 2013 to September 2014 - sales finally rebounded when rates decreased. But this time, interests rates are not going down, in fact, they are probably going to increase even further.m outlook is uncertain, Yun stressed that he is very optimistic about the long-term outlook. The current home sales level matches sales in 2000. However, mortgage rates are much lower today compared to earlier this century, when mortgage rates averaged 8 percent. Additionally, there are more jobs today than there were two decades ago. So, while the long-term prospects look solid, we just have to get through this short-term period of uncertainty.
The inflationary pressure is all but disappearing. Given that condition, there is less of a need to aggressively raise interest rates. Looking at the broader economy and keeping in mind that the housing sector is a great contributor to the economy, it would be wise for the Federal Reserve to slow the raising of rates to see how inflation develops.
.... expects existing-home sales this year to decrease 3.1 percent to 5.34 million, and the national median existing-home price to increase 4.7 percent. Looking ahead to next year, existing sales are forecast to decline 0.4 percent and home prices to drop roughly 2.5 percent.
Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 385,000 in November 2018.
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Using this methodology, 425,000 existing home unadjusted sales were forecast in October 2018 versus the actual reported number of 446,000 (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 is 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).
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