The National Association of Realtors (NAR) seasonally adjusted pending home sales index remains in contraction year-over-year. Our analysis shows continued worsening of growth. The quote of the day from this NAR release:

... It's evident in recent months that many of the most overheated real estate markets - especially those out West - are starting to see a slight decline in home sales and slower price growth

Analyst Opinion of Pending Home Sales

The rolling averages remain in negative territory. The data is very noisy and must be averaged to make sense of the situation. There is no signs of a surge in home sales despite the headline growth, and the long-term trends continue to be generally downward,

Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).

The NAR reported:

• Pending home sales index declined 0.7 % month-over-month and down 2.3 % year-over-year (reported down 2.5 % last month).
• The market [from Nasdaq / Econoday} was expecting month-over-month growth of -1.1 % to 1.0 % (consensus +0.0 %).

Econintersect's evaluation using unadjusted data:

• the index growth rate accelerated 3.4 % month-over-month and down 0.5 % year-over-year.
• The current trend (using 3 month rolling averages) is decelerating and in contraction.
• Extrapolating the pending home sales unadjusted data to project August 2018 existing home sales would be down 3.1 % year-over-year for existing home sales.

From Lawrence Yun, NAR chief economist:

.... the housing market's summer slowdown continued in July. Contract signings inched backward once again last month, as declines in the South and West weighed down on overall activity. It's evident in recent months that many of the most overheated real estate markets - especially those out West - are starting to see a slight decline in home sales and slower price growth.

The reason sales are falling off last year's pace is that multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it.

Pointing to annual changes in active listings data at realtor.com®, increasing inventory in several large metro areas, and especially many out West, will likely help cool price growth to more affordable levels going forward. Even as days on market remains swift in many of these areas, Denver, Santa Rosa, California, San Jose-Sunnyvale-Santa Clara, California, Seattle, Nashville, Tennessee, and Portland, Oregon were among the large markets seeing a rise in active listings in July compared to a year ago.

Econintersect forecasts unadjusted existing home sales by offsetting the pending home sales index one month. This forecast suggests unadjusted existing home sales of 515,000 in August 2018.

Using this methodology, 505,000 existing home unadjusted sales were forecast in July 2018 versus the actual reported number of 522,000 (which is subject to further revision).

Keeping things real - home sales volumes are only 2/3rds of previous levels.

Caveats on the Use of Pending Home Sales Index

According to the NAR:

NAR's Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity.

The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years.

…… When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a "pending home sale." The majority of pending home sales become home sale transactions, typically one to two months later.

NAR now collects pending home sales data from MLSs and large brokers. Altogether, we receive data from over 100 MLSs & 60 large brokers, giving us a large sample size covering 50% of the EHS sample. This is equal to 20 percent of all transactions.

In other words, Pending Home Sales is an extrapolation of a sample equal to 20% of the whole. Econintersect uses Pending Home Index to forecast future existing home sales.

Econintersect reset the forecasting of existing home sales using the pending home sales index coincident with November 2011 Pending home sales analysis (see here) - as the NAR in November revised the historical existing home sales data.

The Econintersect forecasting methodology is influenced by the speed at which closings occur. When they slow down in a particular period - this method overestimates. The number of cash buyers are speeding up the process (cash buyers analysis here). A quick cash home sale process could begin and end in the same month. On the other hand, contracts for short sales can sometimes take months to close. Interpreting the pending home sales data is complicated by weighing offsetting effects in the current abnormal market.

Please note that Econintersect uses unadjusted data in its analysis.

Econintersect determines the month-over-month change by subtracting the current month's year-over-year change from the previous month's year-over-year change. This is the best of the bad options available to determine month-over-month trends - as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).