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 NAR assumes that 75%-80% of all homes pending will close within 60 days while the remaining will close within 120 days. Thus it is considered a prediction of future home sales.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. This is because of the index’s methodology: 1. It doesn’t measure new construction homes 2. It doesn’t track For Sale By Owner properties 3. Its sample set covers just 20 percent of MLS transactions
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.
In June — for the second time in three months — the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.
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.