Understanding 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.
The index is intended to predict home sales but it may not be it’s best use for several reasons. 1. It doesn’t track FSBO sales 2. It samples only 20% of all the MLS transactions 3. it doesn’t take into consideration new construction.
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.
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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