NAR Launches New Leading Indicator For The Housing Market

March 7, 2005


WASHINGTON (March 7, 2005) – After several years of study and data collection, the National Association of Realtors® has developed the a new leading indicator for the housing market.

The index promises to provide advance information on future home-sales activity and offers more solid information on changes in the direction of the market than any of the indicators currently available.

The Pending Home Sales Index, based on data collected for January, stands at 120.6, which was 2.1 percent below December but 8.6 percent above January 2004. The index is based on pending sales of existing homes, including single-family, condo and co-op. A home sale is pending when the contract has been signed but the transaction has not closed. Pending sales will typically close within one or two months of contract signing.

David Lereah, NAR's chief economist, said the level of contract activity in January indicates a sense of the direction for existing-home sales in February and March. "The Pending Home Sales Index tells us that home sales activity in the near term is expected to be historically high, but is trending off of peak levels recorded in 2004," he said. Data on February existing-home sales will be released March 23.

The index is based on a large national sample, representing about 20 percent of 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. The modeling for the index received input from the U.S. Federal Reserve Board and independent housing analysts.

"As market analysts and government agencies come to recognize the value of this new leading indicator for the housing sector, the PHSI has the potential to become the most relevant gauge of future housing market and related economic activity," Lereah said.

Existing-home sales, which account for 85 percent of total residential transactions, report recent history and measure sales that were closed in the prior month. Since the EHS series is based on a large sample, nearly 40 percent of all home sales, that series is a stable measure for the U.S. and regional housing markets. EHS focuses on the seasonally adjusted number of sales, median home prices and housing inventory levels.

There are a few housing indicators that are thought to be leading indicators. New-home sales, which account for 15 percent of transactions, are considered a leading indicator because they are based on contracts signed in the prior month; however, the sample is small (about 2 percent of new-home sales), so the data is more volatile and it takes many months to establish a trend. In addition, the relationship between new-home sales and existing-home sales is not consistent over time.

Because the Pending Home Sales Index is based on a much larger national sample, it is a more accurate leading indicator of housing activity.

An index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed. Coincidentally, 2001 was the first of four consecutive record years for existing-home sales. 2001 sales are fairly close to the higher level of home sales expected in the coming decade relative to the norms experienced in the mid-1990s. As such, an index of 100 coincides with a historically high level of home sales activity.

Regionally, the PHSI in the Northeast rose 3.7 percent to 105.9 in January and was 1.2 percent above a year earlier. In the West, the index of 135.3 rose 1.9 percent from December and was 21.8 percent higher than January 2004. The index in the Midwest declined 4.5 percent in January to 113.5 but was 2.4 percent higher than a year ago. In the South, the index fell 5.6 percent to 123.2 in January but was 8.0 percent above January 2004.

The regional data are not as robust as the national data and may be subject to meaningful revisions from time to time. NAR we will continue to expand the regional market coverage and will develop an index for state markets and the sample size grows.

Source: The National Association of Realtors®

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