The National Association of Realtors (NAR) seasonally adjusted pending home sales index remains in contraction and worsened year-over-year. Our analysis shows continued worsening of growth. The quote of the day from this NAR release:

... So far, the partial government shutdown has not caused any obvious damage to home sales. Seventy-five percent of Realtors reported that they haven't yet felt the impact of the government closure ...

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 downward. Note that the downward trend of home sales began in mid-2015 - and unlike the NAR's optimism, we see no upturn for home sales in 2019.

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 2.2 % month-over-month and down 9.8 % year-over-year (originally reported down 7.7 % last month).
• The market [from Econoday} was expecting month-over-month growth of -0.4 % to 0.4 % (consensus 0.1 %).

Econintersect's evaluation using unadjusted data:

• the index growth rate decelerated 1.7 % month-over-month and down 9.5 % 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 January 2019 existing home sales would be down 9.8 % year-over-year for existing home sales.

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From Lawrence Yun, the NAR chief economist:

.... cited several reasons for the decline in pending sales. The stock market correction hurt consumer confidence, record high home prices cut into affordability and mortgage rates were higher in October and November for consumers signing contracts in December.

So far, the partial government shutdown has not caused any obvious damage to home sales. Seventy-five percent of Realtors reported that they haven't yet felt the impact of the government closure. However, if another government shutdown takes place, it will lead to fewer homes sold.

As the government reopens, more mortgage options will come available for consumers. "Some home transactions were delayed, but we now expect those sales to go forward.

Despite the low home sales in December, the housing market will see improvement in 2019. The longer-term growth potential is high. The Federal Reserve announced a change in its stance on monetary policy. Rather than four rate hikes, there will likely be only one increase or even no increase at all. This has already spurred a noticeable fall in the 30-year, fixed-rate for mortgages. As a result, the forecast for home transactions has greatly improved.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 285,000 in January 2019.

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Using this methodology, 410,000 existing home unadjusted sales were forecast in December 2018 versus the actual reported number of 377,000 (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).