Who Doesn't Understand the Pending Home Sales Index?
Only two groups: The Media and Wall Street economists.
I'll make this as simple as possible. (If you are a journalist that covers this area, please read and UNDERSTAND this).
The NAR release makes clear (in the footnotes) that the Pending Home Sales Index was a NEGATIVE REPORT. This was not a positive, despite what you may have read -- or wrote -- about this.
Here are 4 details you need to understand:
1. The Pending Home Sales Index is down 12.3% Y/Y.
As the NAR notes itself, it is the annual data, not the monthly number, that matters most.
2. 30-40% of these pending sales were distressed/foreclosure sales. Many of the ‘pendings’ are short sales -- bought for much less than the amount owed on the mortgage. The majority of these will not get approved by either the seller (REO Bank) or the financer (mortgage originator).
3. There is a growing gap between PHSI and actual closings (See NT chart below).
4. The monthly rise is nothing more than regular seasonality.
Look at the Pending Home Sales Index and Existing Homes Sales, we see that month-to-month sales gains in 7 out of the 8 cases DO NOT correlate with Existing Homes Sales gains two months later -- most of the time, its been flat to negative.
Chart courtesy of Northern Trust
What is amazing is how many people got this wrong, either through ignorance or laziness.
Here is our media PHSI hall of shame:
Reuters: Housing lies at the heart of the economic problems, and the rise in the index of pending home sales, which is based on contracts signed in June, was a welcome bit of good news.
Marketwatch: In a sign that the U.S. housing market may strengthen in coming months, an index of sales contracts on previously owned U.S. homes rose 5.3% in June from the prior month, the National Association of Realtors reported Thursday.
Atlanta Journal-Constitution: A measurement of pending home sales rose in June in a rare piece of positive news for the beleaguered market.
FT.com: A forward-looking index of US home sales bounced back in June to its highest level since last October, offering some respite from gloomy data on the housing crisis... That was 12.3 per cent below the index's reading in June 2007 but still marked a clear improvement over the small drop expected by most economists. A levelling-out in sales is considered a key first step towards recovery for the ailing US housing market, since it could lead to a lower supply of unsold homes and therefore contribute to a stabilisation in prices.
Thomson Reuters: "An index of future home sales rose in June to the highest level since October, a sign that buyers could be starting to dip their toes into a weak housing market, the National Association of Realtors (NAR) said today. The pending sales index is supposed to be a leading indicator for the housing market, based on contract signings that usually lead to actual sale closings in one or two months."
The Street.com: "This monthly rise, along with the expected effects of recently passed housing stimulus bill, suggest some improvement for upcoming existing-home sales. "With roughly 2.5 million first-time home buyers taking advantage of the temporary tax credit, existing-home sales are likely to rise 7.0 percent to 5.51 million in 2009 from an expected total of 5.15 million this year," the NAR reported."
Wrong, wrong, wrong.
Its not just the media that missed the facts here -- some economists that should know better also screwed the pooch on this one:
Ian Shepherdson, chief U.S. economist at High Frequency Economics: "This is the second upside surprise in three months, so it is [hard] to ignore. We're guessing, though the numbers offer no [breakdown], that sales of foreclosed homes are driving activity. We doubt sales of non-foreclosed homes are rising, given the recent rise in mortgage rates and continued price declines. [Still], anything which reduces inventory, whether of foreclosed [homes] or not, is a very welcome development. It does not fix the housing market, though, but it might be the beginning of the end of the crash."
Joel L. Naroff, chief economist of Commerce Bancorp: Foreclosure sales undoubtedly are a significant aspect of the improvement," "It is making lots of homes affordable to buyers who have the credit and money but not a lot of income." "Everything taken together, I believe we have bottomed when it comes to existing home sales," Naroff said.
Anyone get it right? Well, Bloomberg came pretty close:
Bloomberg: "The pending resales report is considered a leading indicator because it tracks contract signings. Closings, which typically occur a month or two later, are tallied in a separate report from the Realtors."
Not great, but better than most.
As mentioned yesterday, CNBC's Diana Olick points to this chart (below) from HousingDoom.com, showing the difference between PHSI and actual closings. Diana gets credit for not buying into the breathless -- and wrong -- hype. Also, Housing Wire also had some good insights.
Of all the media I reviewed, Marketwatch's Rex Nutting is the only person who got this right:
"It's wise not to get too excited about this increase: These data are extremely volatile from month-to-month, and a big increase in the pending index doesn't necessarily translate into a big increase in the existing-home sales in the next month.
Signing a contract to buy a home is not the same as actually buying it. Many sellers may be desperate to accept any bid, no matter how unlikely it will be that the buyer will get financing."
Rex was one sentence away from sheer perfection; I would have added this line: "The NAR notes that its the annual data, and not the monthly number, that correlates most to sales over the next two months."
The rest of the Media fulfilled the important function in a democracy and free market based economy of acting as stenographers for a trade group notorious for their spin. (Nicely done)
I find it amazing that so few people fail to read the footnotes or methodology of a fairly major Housing related release. Contemptible.
Well, no more. I have spent 6 months politely chiding journos that they are missing the actual facts of the release. That hasn't worked -- so I am now moving to embarrass people who are disserving the investing public. When honey the doesn't work, its time to move to vinegar.
Media Gets Pending Home Sales Wrong (Again!) (August 2008)
Revisiting Housing Seasonality & the Perennial Bottom Callers (July 2008) http://bigpicture.typepad.com/comments/2008/07/revisiting-seas.html
Pending Home Sales Rise, Wider Gains Anticipated as Buyers tap Housing Provisions
NAR, August 07, 2008
Pending Home Sales Index Moves Up, Will Actual Home Sales Advance?
Asha G. Bangalore
Northern Trust, August 7, 2008
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Thank you for this!
It has been a pert peeve of mine forever.
Posted by: anonymous 1 | Aug 8, 2008 7:41:50 AM
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