The National Association of Realtors compiles and produces an index that tracks pending home sales in the U.S. Economists use this as another gauge to help them forecast where the housing market and the U.S. economy is heading. We’ve covered a few other indices before on pricing, home starts, building permits, etc. This one will cover the index for home purchase contracts that are signed to buy houses, condominiums, and town homes.
The Pending Home Sales Index (PHSI) tracks how many homes were contracted for purchase in the prior month. Here’s how it works. When someone is purchasing a home, they shop around, make written offers on properties listed for sale on the local multiple listing service (MLS), and hopefully, one of their offers will be accepted by the seller. If the seller accepts the offer to purchase the house, the listed status of the house become “pending." This means the buyer and seller have made an agreement and signed a contract for the buyer to purchase the house. At that point, the house goes into “escrow” and the buyer and seller work to clear outstanding issues, like having a home inspection done or working on obtaining financing for the purchase.
The PHSI at that point, when pending/escrow occurs, records the pending sale in its data. It usually takes about 45 days to close escrow and transfer ownership of the property from the time it goes into escrow, though short sales can take much longer. There is a high probability that the sale will eventually close escrow and the title will transfer. However, some of these pending home purchases are cancelled during escrow and the home’s listing status reverts back to “available” for other purchasers to pursue. Regardless of what ultimately occurs, the PHSI records every pending sale as a data point.
The March PHSI figures showed the index saw a 9.2% increase over the last 12 months on this chart . The Northeast and the Midwest regions have shown the largest increases, with the West lagging and actually dropping slightly in the past year. But the overall index increase shows that more people are out in the market looking for homes, making offers, and contracting upon single family homes, condominiums, and town homes. This is good news, as in tough economic times, people typically only start making large purchases when they are confident that the economy is beginning to pick up steam. The reason these parties might look at and highly regard the PHSI index is that it is an early indication that citizens are gaining confidence in the economy. The people feel good enough about their economic and income prospects to make a large purchase and commit to real estate ownership. And if pending sales are up, that means actually sales will increase within the following 45-60 days. And when actual sales increase, that means economic activity occurs.
And that economic activity is commissions being paid to the sales professionals, lender fees, escrow fees, and title agents earning fees. It also includes home inspectors inspecting, and appraisers appraising, not to mention when new home owners head to the improvement stores to stock up on paint, flooring, etc. It's good for our economy to get these large dollar transactions flowing and more money and consumer sentiment up.
Let’s hope it continues forward in 2012 because as it does, individuals' confidence will increase even more and more people will hopefully start searching for and buying properties. And clearly that will benefit the housing market and all the people in our country.