As I read through available housing stats during this COVID-19 era to get a general sense of where the overall market is going, it is notable how difficult that task has become. Everything we look at seems to require an asterisk. While such punctuation was required before this global pandemic, the need for fresh insights makes the qualitative aspects of information more critical. We know that closing price trends are lagging indicators, but tend not to think of current contract trends as a lagging indicator, yet that assumption has always been wrong. The day to day nature of the COVID-19 pandemic has made the need for qualifiers more evident.
The National Association of Realtors (NAR) metric known as the Pending Home Sales Index (PHSI) is regarded as the fastest moving barometer of market direction. Still, its flaws tend to be overlooked, especially when compared to closed sales.
Meeting of the Minds
The “meeting of the minds” process is where the buyer and seller negotiate general price and terms, usually facilitated by listing and buyer brokers. Once the parties are in sync on price and terms, their respective attorneys work out the written language, which leads to the signing of the contract. Once the contract details are ironed out, both parties sign, and it then appears as a written deal in the MLS.
NAR posits that closing trends follow contract trends by two months.
The Pending Home Sales Index is a monthly release
The April 29th release by NAR is the most current version available as of this moment, and it reflects the market data of March that includes “meeting of the minds” data from February. This PHSI release represents a two-month lag, and the following chart using non-seasonal YOY% change patterns is pretty terrifying. And that’s just the data through March.
NAR Pending Home Sale Index compiled from publicly shared data and charted by Miller Samuel.
Jonathan Miller
The May PHSI report that uses April contracts will be released on May 28th (four days from now), but I deliberately wrote this beforehand to show the potential lag in contract data.
Pending Sales (Contracts) Is Less Backward Looking
NAR publishes the PHSI monthly and always describes it as “forward-looking,” yet it is not. I think of their PHSI index as “less backward-looking” because it is only forward-looking in the context of closed sales, and we know closing sales are lagging indicators. Closed sale dates generally lag contract dates by 30 to 90 days, the latter being markets like New York. Sales contracts can lag the “meeting of the minds” by a few days or more than a month, depending on the market location and condition.
Contracts Can Blow Up
There are specific periods, especially in quickly deteriorating markets, when large swaths of contracts don’t close. I recall that about one-third of pending sales blew up shortly after the housing bubble burst more than a decade ago. Just prior to the Coronavirus crisis, the contract failure rate was in the single digits. I haven’t found fresh post-COVID19 data on this yet (because it is lagging).
In New York City’s situation where I am based, closing attorneys tell me that written contracts lag the “meeting of the minds” by a month or more right now. Buyers are trying to cut better terms, and sellers are trying to keep the deal together. However, in a rapid market, especially those markets that have recently eased restrictions for real estate brokers to physically show properties, that delay might only be a few days.
The Contract Coverage Area Is Very Broad
NAR says that the PHSI report covers about 20% of the market and we’re not sure what 20% it covers in any given month. Hopefully most of us know that there is no “national housing market.” Contract activity is much more useful as a local trend indicator but it can give us a sense of the U.S. housing zeigeist.
Typical Report Timeline
“Meeting of the Minds” – price and terms agreed to
[Less than a week to more than a month]
“Written contract” – parties sign
[A month]
PHSI Reported By NAR “Contracts”
[Two months]
Existing Home Sales Reported BY NAR “Closings”
_____________________________________________
I still look to pending home sales data as a broad market trend indicator because it is the most recent we have, but it is more useful in local market conditions. But either way its use often needs an asterisk.