Investigation into Pending Home Sales Reinforces Recovery

On the 5^th of January, the National Association of Realtors released its latest Pending Home Sales Index (PHSI), showing a 16% decline over October. Almost immediately the media seized these numbers and outlets like MSNBC reported “Housing Industry May Be Headed for Double Dip”. Of course any decline anywhere in the economy right now is a concern, but economic recoveries don’t happen overnight. I thought I would invest some time in reviewing the numbers and while doing so, I learned there was more of a story to tell.

First, by definition the PHSI is just what it sounds like. PHSI is an index of “pending” home sales which is a barometer to future sales. A home becomes pending when a seller accepts a contract on the property and it’s changed to pending in the Multiple Listing Service. According to the National Association of Realtors, this data comes from over 100 MLSs and 60 large brokers which is only about 20% of all the transactions. New home sales, FSBOs (including Trulia, Zillow, and Craigslist FSBOs), lease purchases, and anything else which is creative are excluded from these numbers. However, of the 20% slice of the market 80% end up closing, offering a good future housing market indicator.

What the media is not giving much emphasis to is that this number is up 15% over November of 2008, showing the market is much healthier than it was 12 months ago. The PHSI for November also is higher than June, 2009 (seasonal peak home-buying time), well above the 2008 average, and roughly the same as the 2007 average. The slowdown was the first decrease in PHSI in 9 months. Economic recoveries don’t show perpetual increases. Also wouldn’t you expect a downturn in November? I looked over prior years and noticed there is always a downturn in November, usually around 5%. What makes this November’s drop so large is expiration of the first-time buyer credit. Of course this is cause for concern as the tax credit impact on the market has been significant. With the extension now in effect until May and expected to have much smaller impact, the real estate market must stand on its own in the 2^nd half of 2010.

Here’s a visual of the raw data, courtesy of the National Association of Realtors:

So a quick recap:

Pending home sales up 15% over November 2008
Down 16% over November, considering the first tax incentive for first-time buyers expired
First decrease in 9 months
4^th highest pending home sales month in 2009
10% higher than 2008 average
Roughly equal to 2007 average
West is only slightly down over October with huge increase over last year (West Coast is usually seen as a leading indicator of the overall economy)

Prognosis

Although we will likely see interest rates rise in 2010 and anemic recovery in the housing market, the data shows the market overall is doing better than it was 6 months ago. Most other sectors of the economy such as factory orders and transportation are improving. Retail sales have stabilized as well, pointing to the worst being behind us. So although we’ve seen a sharp decline month-over-month the overall real estate trend is up, including PHSI. The PHSI is likely to be volatile in the near term and the true indicator will be 2^nd half 2010 when government programs expire.

As an investor, you have to dig deep when you see media reports signaling economic trends based on short term statistics. A more accurate picture can be derived from looking at overall trends. One month is not a trend. By definition economic trends are periods of 2 consecutive quarters. As they say there are “lies, damned lies, and statistics”. Passive landlords should keep accumulating via investment property purchases at prices unseen in many years, seeing their profits over the long-term. Wholesalers and realtors will continue to deal with lower transaction volume, shifting their focus to FHA buyers or renovated properties with rental-guarantee incentives for investor buyers. The overall trend is recovery but as an investor you need to buckle-up and prepare for the bumps. Investigate the economic numbers as you should when buying investment property, with caution and skepticism.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.