This story was updated on May 27, 2022.
This is the first installment of a new Inman series digging into, and explaining, routine real estate economic metrics and how they’re used to illuminate the current housing market and inventory crises. Check back tomorrow for the second installment on new home sales.
Each month, the National Association of Realtors (NAR) performs a ritual.
In emails and reports, the influential trade organization sends out a data set described as “pending sales.” Sometimes the numbers are up, sometimes they’re down. But either way, Inman and others regularly parse the numbers and turn them into headlines about the health of the housing industry.
But what, exactly, do the numbers mean? Where do they come from, and just how many conclusions can we draw from them?
The idea is that pending sales numbers offer a window into what the market is doing now and what it’ll do in the future. They’re a kind of crystal ball.
But to get a better sense of what exactly the numbers say — and what agents need to know — Inman reached out to a handful of economists and obtained years’ worth of data. The takeaway from all of this is that pending sales numbers offer a useful window into the state of the housing market — and that there may be more nuance to the data than is immediately obvious.
Here’s what you need to know:
Table of Contents
- What exactly counts as a “pending sale”
- Why pending sales matter
- What the latest numbers say
- What we can glean from the latest pending sales data
- Additional resources
To begin, let’s get some definitions out of the way, because while “pending sales” sounds fairly self-explanatory, there’s maybe more to the concept than meets the eye.
As the name implies, a pending sale represents a home that has gone under contract but hasn’t closed yet.
However, the NAR also produces a “Pending Home Sales Index” (PHSI), which is actually a metric that looks at the entire market by taking a sample of just some pending sales. According to a statement on NAR’s latest index, the sample typically represents roughly “20 percent of transactions for existing-home sales.”
Pay special attention to the “existing-home” part of that quote; the PHSI measures pending contracts on homes that were already built, as opposed to new construction.
The PHSI is also used to compare sales to the level of contract activity that was happening in 2001, when NAR first started looking at this data. So, if the PHSI is at 100, activity would be the same as it was in 2001. If it’s below 100 — as it was in the numbers NAR reported just days ago — activity would be lower. And if the PHSI is higher than 100, activity is higher than it was in 2001.
This may all sound a little wonky.
But the important thing to remember here is that there’s a difference between a simple pending sale and the concept and data set that economists use. In other words, the PHSI is a comparative measure of the overall industry, and that’s typically what news stories about pending sales are focused on.
Pending sales may be fairly easy to define, but that doesn’t entirely answer an important question: Who cares?
Or, more specifically, why look at pending sales numbers as opposed to just focusing on, say, closed sales?
In fact, there are a few reasons.
For starters, pending sales help observers understand where the market is going. It’s forward looking. Matthew Gardner, chief economist for Windermere Real Estate, told Inman that pending sales are “more of a leading than a lagging indicator.”
“It can give you an idea of where closed sales will be a little bit further down the road,” he said. Gardner went on to explain that, typically, about 80 percent of pending sales close, and that those closings generally happen between 30 and 60 days in the future.
There are other ways to use the data as well. Realtor.com Chief Economist Danielle Hale noted that as part of their ability to foreshadow what’s happening in the market, pending sales data can highlight the impact of disruptive events.
For example, when the housing bubble popped in 2008, closed sales numbers initially stayed strong as existing contracts played out. But pending sales quickly fell off, which proved to be an early warning sign of trouble.
Hale said that pending sales also offer early insights into the way other disruptive events, such as weather disasters, are impacting the market.
“They kind of disrupt pendings more than closings,” Hale said of natural disasters.
Daryl Fairweather, chief economist for Redfin, said that very thing happened in February 2021, when wind storms in parts of the U.S. led to some homes falling out of escrow before closing.
Another useful way to use pending sales numbers is to glean from them information about what kind of market a particular place is in.
For instance, Fairweather said that in a seller’s market, homeowners “have more power to take an offer that’s going to be really likely for the deal to close.”
“So more would go from pending to sold than they would in a buyer’s market,” she explained.
The point is that pending sales numbers can offer indicators of where the market is headed, who has the upper hand, and what else has been going on that might impact housing.
As Inman has previously reported, NAR released new data in the final days of May showing that pending sales were down 3.9 percent in April compared to March. April consequently marks the sixth straight month of declines.
In a statement on the numbers, NAR’s Chief Economist Lawrence Yun noted that the latest figures marked the slowest pace pending home sales have hit in nearly 10 years, as buyers battle continued increasing mortgage rates.
The PHSI also fell to 99.3 in April, which was 9.1 percent below April 2021 levels.
“The latest contract signings mark six consecutive months of declines and are at the slowest pace in nearly a decade,” Yun said in the statement, adding that he additionally anticipates existing-home sales to fall by 9 percent through 2022 and home price appreciation to moderate to 5 percent through the end of the year.
Despite the overall declines, the Midwest managed to buck the trend and saw its PHSI rise 6.6 percent from a month earlier to 100.7 in April 2022. Still, that was down 2.8 percent from April 2021.
In the Northeast, the PHSI fell 16.2 percent from March to April, hitting 74.8. That was down 14.3 percent year-over-year. In the South, the metric declined 4.7 percent to 119 in April, and fell 10.3 percent year-over-year. And in the West, the PHSI dropped 4.3 percent to 85.9, a decline of 10.5 percent year-over-year.
Looking back over time, NAR’s data shows that the PHSI was particularly high over the last two years compared to historical numbers, but that it has since fallen significantly in the most recent data set.
The chart above also captures the rollercoaster real estate experienced over the course of the pandemic.
So we know that pending sales foreshadow the future of the market, and that April’s numbers were down. Does that spell trouble?
Economists don’t seem to think so.
In the statement on the latest numbers, for instance, Yun threw cold water on the idea of a bubble bursting thanks to the fact that home prices themselves don’t appear to be falling.
“Home prices in the meantime appear in no danger of any meaningful decline,” he said. “There is an ongoing housing shortage, and properly listed homes are still selling swiftly – generally seeing a contract signed within a month.”
Ruben Gonzalez, chief economist with Keller Williams, also said that the latest figures are well within the bounds of a normalizing market.
“As we look ahead to the summer months, we continue to expect year-over-year declines in total pending home sales after the extremely hot market we witnessed in the summer of 2021,” Gonzalez said in a statement emailed to Inman. “Recently the average 30-year fixed-rate mortgage appears to be leveling off around 5.25 percent, a full 2.25 percent above where rates were last year. These higher rates will be weighing on demand going forward; however, the market seems well-positioned to absorb the impact so far.”
Such comments echo those of other economists who also recently told Inman they don’t see a bubble on the horizon. Among them, Redfin Chief Economist Daryl Fairweather observed that “home price drops are climbing in the national data,” but added that the data currently doesn’t point to a collapse.
“We don’t expect that there’s a national home price bubble,” she said.
She and other economists agreed with Gonzalez that a big thing driving the current shift in the market is rising interest rates. But she also expects rates to level out, and even to fall again eventually.
“Once these inflation woes are resolved,” she said, “rates will start going in their long-term trajectory, which is down.”
Jessica Lautz, NAR’s president of demographics and behavioral insights, agreed, saying that the interest rates driving the current market trends should eventually settle down, and that there is a lot of “hot buyer demand that still exists.”
“There are a lot of buyers who have been waiting for less competition in the market place,” she told Inman, noting that such demand should help the market stay afloat and avoid the kind of collapse that happened in 2008.