How to understand the Pending Home Sales Index

The 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 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.

When the Pending Home Sales Index is rising, we can infer that more buyers are in the market for homes and this is a signal of market strength. After all, pending sales can’t happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.

The Pending Home Sales Index experienced a large increase in June 2008 for the 2nd time in 3 months. This occured even as most economists were calling for a decline. This indicates an overall gain in the market for demand.

Again, this does not show us exactly how many of these transactions have closed. We only know from this data that the market demand is increasing since more buyers are putting houses under contract. And typically when buyer demand is increasing then we can assume the real estate market will not be far bhind.

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