Understanding the Pending Home Sales Index

When home sellers accept a contract on MLS-listed property, the property’s official status changes from “Active” to “Pending”. By measuring the number of “Pending” homes nationwide, the National Association of Realtors publishes its once-monthly Pending Homes Sales Index.

The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will “close” within 60 days, and most others will close within 120 days.

But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. This is because of the index’s methodology: 1. It doesn’t measure new construction homes 2. It doesn’t track For Sale By Owner properties 3. Its sample set covers just 20 percent of MLS transactions

In addition, in a tough mortgage climate such as the one we’re in now, a greater percentage of pending sales will fail to close at all because of lack of financing.The Pending Home Sales Index still has its place, however — it’s a terrific look at the buy-side demand for homes.

The Pending Home Sales Index is an excellent way to view the overall markets strength. When the PHSI is moving up we know that there are more buyers in the market for homes and typically with more demand comes higher prices.

The Pending Home Sales Index experienced a large increase in June 2008 for the 2nd time in 3 months. This occured even as most economists were calling for a decline. This indicates an overall gain in the market for demand.

Now, again, the uptick doesn’t mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding “now” to be a good time to buy real estate.That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn’t usually far behind.