Pending Home Sales Index Up in January, Reaching 20-Month High

By: Mark Lieberman, Five Star Institute Economist     Reprinted from DSNews.com

The pending home sales index (PHSI) rose in January to 97.0 from a downwardly revised 95.1 in December. At 97.0, the index is at its highest level since April 2011, the National Association of Realtors reported Monday.

The index rose for the third time in the last four months and the January reading was 8 percent above January 2011 levels, but 26.5 percent below the April 2005 peak. The index began in January 2005.

Pending home sales are counted when sales contracts are signed and are viewed as a leading indicator of existing home sales; recent reports suggest that home re-sales should be a bit stronger over the next couple of months, but at a level that is still fairly subdued.

The PHSI has been trending upward, albeit modestly for most of the past two years. Despite the 20-month high, the index is relatively subdued. At the same time, a substantial number of sales contracts are failing to meet underwriting standards and/or other loan criterion as sales contract cancellations remain elevated.

Although a hopeful trend, home sales still appear to be searching for their fundamentally determined level – a level that is likely to be relatively subdued.

The PHSI in the Northeast rose 7.6 percent to 78.2 in January and is 9.8 percent above a year ago. In the Midwest, the index declined 3.8 percent to 88.1 but is 10.8 percent higher than January 2011. Pending home sales in the South increased 7.7 percent to an index of 109.1 in January and are 10.5 percent above a year ago. In the West, the index fell 4.4 percent in January to 101.9, but is 0.7 percent above January 2011.

The PHSI is based on data from Multiple Listing Services (MLSs) and large brokers.

According to the NAR, the index provides advance information on future home-sales activity and offers more solid information on changes in the direction of the market than any of the indicators currently available. Generally, pending home sales become existing-home sales one-to-two months later suggesting it can be used to predict both mortgage demand and sales activity.

While the volume of mortgage purchase applications edged down in January, suggesting sluggish activity, the purchase index collapsed in February.

Realtors are reporting more contract cancellations, which would cause the pending home sales index (based on initial signings) to overstate existing home sales (based on contract closings).

According to the NAR, 33 percent of existing contracts were cancelled in January – unchanged from December but up from only 9 percent in January 2011. The rise in cancellations reflected declining mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price.