By Ryan Casey Stephens, FPQP®
Special Contributor
As the holiday season draws to a close, with Christmas memories still fresh and New Year’s Eve on the horizon, it’s a natural time for reflection and anticipation. We look back at the accomplishments and challenges of the past year, celebrate with loved ones, and eagerly await the fresh possibilities of a new beginning. In much the same way, economic reports offer us a dual lens: some reflect on where the economy has been, while others provide crucial insights into where it might be headed.
For those deeply invested in the housing market, understanding these forward-looking indicators is paramount. Among the most pivotal reports for gauging the future health of the real estate sector is the Pending Home Sales Index (PHSI). As we prepare to delve into November’s data, released this week, let’s take an in-depth look at what this report signifies, how it’s compiled, and why it holds such sway over market expectations.
Understanding the Pulse of the Market: The Pending Home Sales Index
The housing market is a complex ecosystem, influenced by myriad factors ranging from interest rates and employment figures to consumer confidence and seasonal shifts. Navigating this landscape requires reliable, timely data. The Pending Home Sales Index, often abbreviated as PHSI, serves as one of the most accurate leading indicators for future housing activity. Unlike reports that focus on completed transactions, PHSI captures the earliest stage of a committed home sale, offering a window into buyer sentiment and market momentum weeks or even months before keys are exchanged.
This critical report is released by the National Association of Realtors (NAR) during the final week of each month, providing data for the preceding month. For instance, in December 2022, we analyze the statistics for November 2022. This timing is crucial, offering near real-time insights into market dynamics. The PHSI measures the number of existing homes in the United States that went “under contract” during the reporting period. Being “under contract” signifies that a buyer and seller have agreed on terms, and the sale is moving towards closing, though it hasn’t officially completed yet. This distinction makes it an invaluable predictor for future housing trends, including subsequent existing home sales figures and price movements.
It’s important to recognize that the PHSI is a robust survey, not an exhaustive count of every single transaction. NAR meticulously gathers data from over a hundred Multiple Listing Services (MLS) across the nation. This extensive sample typically accounts for approximately 20 percent of all housing activity, making it highly representative of the broader market trends. The homes included in this comprehensive sample primarily encompass single-family residences and condominiums, reflecting the most common types of residential properties purchased by consumers. By focusing on homes under contract, the PHSI offers a clear, forward-looking snapshot, enabling analysts, real estate professionals, and potential homebuyers to anticipate market shifts well in advance of official closing data.
Decoding the Data: How the PHSI is Compiled and What “Under Contract” Really Means
The credibility and predictive power of the Pending Home Sales Index stem from its meticulous compilation process and the precise definition of what it tracks. The National Association of Realtors, as the largest trade association in the United States and a leading authority on real estate, employs a sophisticated methodology to ensure the accuracy and relevance of the PHSI. Their access to a vast network of MLS data allows them to capture a significant and representative cross-section of housing transactions.
When a home is reported as “under contract,” it means that all contractual agreements have been finalized between the buyer and seller, and the transaction is officially moving forward. This stage typically follows the initial offer and acceptance, and precedes the final closing. While a sale under contract is not a completed sale, it represents a strong commitment from both parties. This commitment is usually contingent upon factors such as financing approval, home inspection results, and appraisal valuations. Despite these potential contingencies, the sheer volume of homes entering this contractual phase provides an early and reliable indicator of buyer demand and market activity. The index itself is normalized to a base year, allowing for easy comparison of current activity against historical norms, providing context for growth or decline over time.
The sample size of roughly 20 percent of national housing activity might seem small at first glance, but it is statistically significant and diverse enough to extrapolate broader market trends. NAR’s ability to collect data from a wide geographical spread, encompassing various housing markets with different dynamics, ensures that the PHSI reflects a balanced national perspective rather than being skewed by regional anomalies. This careful aggregation and analysis of “under contract” data make the Pending Home Sales Index an indispensable tool for anyone seeking to understand the trajectory of the U.S. housing market.
Avoiding Confusion: Differentiating Pending Home Sales from Existing Home Sales
In the realm of real estate statistics, two reports frequently cause confusion due to their similar names but distinct measurements: Pending Home Sales and Existing Home Sales. While both offer insights into the residential market, their differing methodologies and reporting timelines mean they serve different analytical purposes. Understanding this distinction is crucial for accurate market interpretation.
Existing Home Sales, another key report from the National Association of Realtors, tracks the number of closed sales and the median prices of previously owned homes across the four major regions of the U.S. This report is a backward-looking indicator, reflecting transactions that have already been finalized. Typically, there’s a lag of one to two months, or sometimes even longer, between a home going under contract and the sale officially closing. This means that an Existing Home Sale reported today often reflects buyer decisions and market conditions from several weeks or months ago.
Economists, real estate analysts, and market watchers generally prefer to track Pending Home Sales over Existing Home Sales when seeking more immediate insights into market health. The primary reason for this preference is “recency.” While it’s true that some home sales might fall through after initially being under contract—due to financing issues, unsatisfactory inspections, low appraisals, or even last-minute buyer’s remorse—the vast majority proceed to closing. More importantly, the PHSI captures the initial commitment based on the most current market conditions, particularly prevailing interest rates.
For example, if mortgage rates experienced a significant shift in a given month, Pending Home Sales for that month would immediately reflect how buyers reacted to those new rates. Existing Home Sales, however, would still be reporting on transactions initiated when rates were potentially very different. Therefore, by tracking pending contracts from the prior month, the PHSI provides the freshest, most accurate glimpse into current buyer activity and sentiment, offering the best available forecast for the health of the housing market in the immediate one to two months ahead. It essentially acts as a forward-looking thermometer for buyer demand, reacting quickly to changes in affordability and confidence.
The Current Landscape and Future Projections: Where Do We Go From Here?
As we anticipate the release of November’s Pending Home Sales data, the recent trend has painted a challenging picture for the housing market. The numbers have shown a consistent decline since July, reflecting a period of significant headwinds. October’s data, for instance, revealed a stark 37 percent fewer homes under contract compared to the same period one year prior. This substantial year-over-year drop underscores the profound impact of rising interest rates and broader economic uncertainties on buyer demand and affordability.
Moreover, seasonality plays a significant role during this time of year. November and December are inherently slower months for real estate activity due to the holiday season, colder weather in many regions, and buyers postponing major decisions until the new year. When this natural slowdown is compounded by persistent market challenges, the impact on pending sales becomes even more pronounced. With the average mortgage rate remaining elevated above 6 percent, affordability continues to be a major hurdle for many prospective homebuyers. Consequently, we can realistically expect to see a continuation of dramatically less pending activity compared to the previous year, at least through the data for December 2022.
Despite these immediate challenges, the Pending Home Sales report carries immense significance as one of the earliest harbingers of recovery for those within the real estate industry. There is a palpable hope that as inflation readings begin to ease, the Federal Reserve will eventually pivot its monetary policy, leading to a stabilization or even a modest decline in mortgage rates. Such a shift would be a critical catalyst, potentially reigniting consumer interest in homeownership and encouraging buyers to re-enter the market.
When this anticipated turning point arrives, the Pending Home Sales report will be among the first economic indicators to register the positive change. Any easing of rates, even a modest one, could translate into improved affordability and renewed buyer confidence, leading to an uptick in homes going under contract. We would then begin to observe positive month-to-month movement in the PHSI, signaling a nascent recovery. This forward-looking report, therefore, remains an indispensable tool for tracking not just the current state of buyer activity but also for identifying the earliest signs of a market turnaround, offering a beacon of hope for a more active and robust housing market in the months to come.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital, bringing extensive expertise in financial planning and real estate financing. He can be reached directly at [email protected] for personalized mortgage advice and market insights.