What is the Pending Home Sales Index?
Posted by Rob Kosberg | Under Home Equity Loan Tuesday Aug 18, 2009The Pending Home Sales Index is a once monthly published account of all homes that have changed status on the MLS from an active listing (or home for sale) to a pending sale (or home under contract). By accounting for the number of homes pending nationwide the NAR publishes it’s index.
The real estate industry views the index as a sign of future home sales. They do this with the assumption that 80% of all homes pending will close within 2 months and the remainder will close with 4 months.
Though the index is intended to give a look ahead to future Home Sales it may not be very accurate due to several factors. 1. It sample about 1 in 5 MLS transactions 2. It doesn’t track for sale by owners. 3. It doesn’t account for new home sales.
In addition, in a tough mortgage climate such as the one we’re in now, a greater percentage of pending sales will fail to close at all because of lack of financing.The Pending Home Sales Index still has its place, however — it’s a terrific look at the buy-side demand for homes.
We can guage the real estate markets strength based on the Pending Home Sales Index by whether it rises or falls. When it is rising we can be sure that there are presently more buyers in the market and usually more demand brings price increases.
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.
Since the PHSI doesn’t indicate closed transactions we only know that demand is greater and that buyers are finding this a good time to move forward with a purchase. This tracking makes the Pending Home Sales Index a worthwhile source of market data since we know that greater demand will usually result in higher real estate prices in the future.
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