Latest Pending Home Sales Index

The National Association of Realtors (NAR) announced Thursday that their September Pending Home Sales Index dropped by 4.6 percent compared to August. The blame was placed on continued tight lending standards and weak consumer confidence.

OK, down 4.6 percent sounds pretty bad. But what does it mean?

First, let’s dissect exactly what this statistic is. The Pending Home Sales Index measures national sales activity of existing homes, and does not measure home pricing. It is a leading indicator based on signed purchase contracts, so actual closings lag by about two months.

The Index base is 2001, a year of fairly brisk home sales activity within a stretch of overall good years. So a value of 100 today would mean that aggregate sales transactions are occurring at the same pace as they were 10 years ago. Like most news releases, the public doesn’t catch the index value and the change from one year ago, just a headline screaming the net change from the prior month.

The U.S. economy has been emerging from recession for nine quarters now (that’s right, growth is 9 for 9). GDP growth can be lumpy, seemingly slowing at times and scaring everyone about a “double dip recession” before charging forward again. The initial measure of third quarter U.S. GDP was also released on Thursday, up a respectable 2.5 percent. Contrary to how most people feel we have in fact never in our history had a higher GDP than we do right here right now.

So where would you guess the Pending Home Sales Index is today?  Does it sometimes feel like it must be somewhere near 70 percent of historical sales activity? The Index has averaged 89 in the trailing 12 months, up from 2010 and 2009 levels.

Prices are down, although nationally they have increased for now with particular strength in the Midwest. But sales activity is certainly not as bad as one might fear. The seasonally-adjusted September 2011 reading did come in low at 84.5 but even this is 6.4 percent higher than the September 2010 figure. I like to focus on the trailing 12 months, and so I’d say that with 89 home transactions today for every 100 in a good year, there is ample opportunity.

In fact, on the selling side, I’d argue that those who are in tune with what makes a compelling price in today’s market have a larger advantage (than previously before) to achieve a transaction over those that won’t realistically accept an aggressive market price. There are just too many overpriced homes out there.  

Let’s also take a quick look at the continued tight lending standards and the weak consumer confidence.

The NAR is pushing for lower down payments and lower “conforming” jumbo loan limits and overall friendlier underwriting practices. You know “too big to fail” banks are fewer in number and much larger than they were previously, but that is somehow OK now.

You know “historically high home ownership rates” meant that marginal consumers with inadequate qualifications were jumping in, but that too should be OK now? Instead of joining the NAR in lobbying for more transactions and corresponding agent commissions, I'll instead root for the longer term price stability that comes from responsible lending standards that in turn foster more responsible consumer borrowing.                

Consumer confidence is weak indeed, as Tuesday’s announced figure of 39.8 represents a two year low. Consumer sentiment per Friday’s release is now in the low 60’s, which is an improvement and is now off the lows. However consumer confidence and consumer sentiment are lagging economic indicators meaning they do not predict the future.

Luckily consumers don’t “do as they feel”, did you know that actual consumer spending has continued to grow for 9 out of 9 quarters in a row now? The stock market, a leading economic indicator, has charged ahead in October, posting its largest monthly gain in many years (you'll see that headline next week).   

Don’t fret over a seemingly negative NAR Pending Home Sales headline. Perhaps home sales activity, measured at 89 percent of a very good year on a trailing 12 month basis, is at the appropriate level.

Home prices have been up for four months now. The economy continues to grow. And it looks like capital in the stock market and the housing market is betting on better prospects ahead.