Pending Home Sales Index Points to Easing Market - NAR
The index is derived from pending sales of existing homes
RISMEDIA, September 5, 2006—Home sales should be leveling out in the months ahead at a lower pace, according to an index based on pending home sales, a leading indicator for the housing market published by the National Association of Realtors(R).
The Pending Home Sales Index, based on contracts signed in July, is down 7.0% to a level of 105.6 from a downwardly revised reading of 113.5 in June, and is 16.0% lower than July 2005.
The index is derived from pending sales of existing homes. A sale is listed as pending when the contract has been signed and the transaction has not closed; pending sales typically are finalized within a month or two of signing.
An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined, and was the first of five consecutive record years for existing-home sales.
David Lereah, NAR's chief economist, said there's a closer relationship between annual changes in the index and actual market performance than there is with month-to-month comparisons.
"In looking at year-to-year comparisons, the pending home sales index has been very close in predicting the actual pace of home sales," Lereah said. "Based on recent changes from a year ago, the index shows existing-home sales should continue to ease after a stronger-than-expected decline in July, but are likely to flatten in the months ahead."
Lereah said psychological factors account for much of the decline in July home sales.
"We've never seen a general decline in the housing market against a healthy economic backdrop where jobs are being created, the economy in growing and interest rates are favorable," Lereah said. "Psychological factors are causing some buyers to remain on the sidelines, waiting for prices to stabilize or for more favorable news about the market and the economy. Contributing to this hesitancy is a lot of negative news stories, but in the end we believe that underlying market fundamentals will prevail."
Regionally, the PHSI in the West declined 5.5% in July to 103.1 and was 20.3% below July 2005. The index in the South dropped 6.4% to 122.3 in July and was 11.3% below a year ago. In the Northeast, the index fell 7.7% in July to 92.1 and was 15.5% below July 2005. The index in the Midwest dropped 9.0% to 93.3 in July and was 20.1% lower than a year ago.
The National Association of Realtors(R), "The Voice for Real Estate," is America's largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
The Pending Home Sales Index is based on a large national sample, typically representing about 20% of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer parallel between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than there is with month-to-month comparisons.
The forecast will be revised September 7, and existing-home sales for August will be released September 25. The next Pending Home Sales Index will be on October 2.
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