Are Pending Home Sales Surging Again in the Housing Market?
Non-Farm Payrolls and ADP Report Help Treasury Prices Rise (Part 5 of 14)
Pending home sales index
The PHSI (pending home sales index) is published monthly by the NAR (National Association of Realtors). It’s considered a leading indicator for the housing market. It measures activity in housing contracts signed for existing single-family homes, condominiums, and co-ops. It takes one to two months for a contract signing to get converted into a sale. As a result, this indicator leads NAR’s existing homes data for that period.
When a home’s sales contract is accepted, it’s recorded into a MLS (Multiple Listing Service) as a pending home sale. NAR collects this data from over 100 MLSs and large brokers. The sample size used by NAR is about 50% of the existing home sales sample. It accounts for nearly 20% of all the transactions.
Higher contract signings mean more business for homebuilders and retailers—like PulteGroup (PHM), Toll Brothers (TOL), and Lowe’s (LOW). Associated ETFs—like the S&P SPDR Homebuilder ETF (XHB)—have ~10% of their assets invested in these three companies. They will do well if these companies do well. Meanwhile, ~20% of the iShares Dow Jones US Home Construction Index Fund’s (ITB) assets are invested in these three companies.
February 2015 report
In data that will bring cheer to the housing market, the pending home sales index rose by 3.1% in February 2015 to 106.9. It rose from a downwardly revised 103.7 level in January 2015. This was the index’s highest level since June 2013—it was 109.4. From a year ago, the index was up 12%. It looks like the harsh weather wasn’t able to keep homebuyers away. The harsh weather pummeled housing starts.
A reading of 100 represents the average level of contract activity during 2001. It was the first year under review by NAR.
Lawrence Yun, NAR’s chief economist, stated that “a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents” were the primary drivers of the rise in sales.
Given that the spring buying season is still ahead, this rise bodes well for the housing market in general. In particular, it’s good for real estate companies.
The Midwest and West led sales. The PHSI for the Midwest jumped 11.6%. For the West, the index gained 6.6% in February. In contrast, the index for the South decreased 1.4% from a month ago. The index for the Northeast fell 2.3%.
Browse this series on Market Realist:
