In response to a comment made in my previous post, I called Walter Molony at Realtor.org and co-writer of the press release, Pending Home Sales Index Slowing.
I wanted to know when the index was created and why. And how as, consumers, we should read the index. (He spoke very quickly, so next time I will use a recorder then podcast it!)
Basically, the Index was created in March 2005, based on 4 years of data
tracking pending sales against existing home sales, or closed transactions.
An index of 100 is equal to the average
level of contract activity in 2001, which was the first of five consecutive
record years for home sales. In developing the model for the index, it
was demonstrated that the level of monthly sales-contract activity from 2001
through 2004 closely parallels the level of closed existing-home sales in the
following two months.
This is important because as Realtors we have no idea what the price of
a home actually went for until the sale is closed, sometimes 30 days or 60 days
after it was listed on MLS. While the PHSI is a
leading indicator of future sales activity, and there is not direct
relationship between the index and price performance, it can help to tell us
what kind of pressure there may be on home prices.
Assuming that housing inventory levels, area employment, mortgage
interest rates and other market factors hold stable, what this means for
sellers is if the pending sales index is about the same as the previous month,
then there is no need to adjust the price. The market is relatively the
same as the period before.
Given that inventory levels have been improving, when the index slips
say 2.5 percent to a reading of 120.6 in November from 123.7 in October, then
pricing needs to be adjusted to something more reasonable rather than taking
the price of the neighbors sold home (data 1-2 months old) and adding 5-10% to
it (assuming the same rate of price over asking as the previous period). In other words, sellers and
their agents need to price their home realistically, or it will sit on the
market until the seller reduces the price, indicative what the market is
willing to pay in the current time period.
For buyers a slide in the index means a more normal market. In San
Francisco that translates to offers at list price instead of 10% over asking.
Imagine that?!
The important thing to remember about the pending
sales index is that it gives those who analyze such numbers a more accurate
measure for predicting the future. Instead of just getting data of
closings each month, we can look at the future direction of the market, which is a good thing on either side of the fence.
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