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Forget Headlines. Get To the Core of the Story

The National Association of Realtors (NAR) will release their Pending Home Sales report today. The report will generate headlines and those headlines will seem in conflict with each other. The reason for the confusion is that there will be nuances within the report.

In order to truly understand the report, we must peel away the headlines and look at the facts and what has influenced them.

First let’s explain what the report actually covers. According to the NAR web site:

The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months… An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.

The reason there will be confusion created by the media reports is actually simple to explain. There will be two different numbers reported:

  • The month-over-month (M-O-M) comparison and
  • The year-over-year (Y-O-Y) comparison

Neither of these numbers will accurately show what is taking place in the real estate market. Let’s explain why:

The Month-Over-Month Comparison

The M-O-M compares pending contracts this month to last month. Analysts are predicting that the report will show a modest gain if any. iMarketnews.com said:

The NAR’s Pending Home Sales Index…will help define the outlook for the housing market for the next few months. The data is likely to stabilize a bit more after the plunge in May that followed the end of the homebuyer tax credit program (April), but it is unlikely to signal any significant pick up in home buying.

Year-Over-Year Comparison

The Y-O-Y compares pending contracts this month to the same month last year. NAR says this is a better indicator of how the market is doing:

There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.

This number may look very ugly in the report. We must remember that last year buyers where rushing to get their homes into contract before the expiration of the original Home Buyers’ Tax Credit on November 30th. Obviously, contracts for the next couple of months will not compare favorably to the same months last year because there is no urgency created by a tax incentive this year.

Bottom Line

There may be very negative news generated by the year-over-year numbers.  Don’t get overly concerned. The reports will look bad because of the manipulation of the numbers by the tax credit. It will take several months before these reports can again be trusted.


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3 replies
  1. Bill McCartney
    Bill McCartney says:

    You are absolutely correct! I have heard people speaking negatively about the decrease in activity but when I remind them that we had the incentives last year they realize it’s not bad at all! In fact it the numbers are very healthy :)

    Reply

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