What is the Pending Home Sales Index?
The National Association of Realtors measures the number of pending homes nationwide on a monthly basis. They do this by tracking when there is a status change from an active listing to a pending sale via the Multiple Listing Service. This is called the Pending Home Sales Index.
The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will “close” within 60 days, and most others will close within 120 days.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. This is because of the index’s methodology: 1. It doesn’t measure new construction homes 2. It doesn’t track For Sale By Owner properties 3. Its sample set covers just 20 percent of MLS transactions
Since many transactions do not close these days due to the mortgage crisis the PHSI may be skewed. it is, however, a great way to assess buyer demand for real estate on a month to month basis.
When the Pending Home Sales Index is rising, we can infer that more buyers are in the market for homes and this is a signal of market strength. After all, pending sales can’t happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.
For example, in June 2008, the 2nd time in three months - the PHSI posted a large increase even though economists expected a loss. The Pending Home Sales Index’s rise indicates that the overall market is experiencing a revival for that quarter.
Again, this does not show us exactly how many of these transactions have closed. We only know from this data that the market demand is increasing since more buyers are putting houses under contract. And typically when buyer demand is increasing then we can assume the real estate market will not be far behind.
