Eye On Housing
In normal times roughly 70% of new home purchases are trade-up buyers (i.e., they have an existing home to sell) so the strength of existing home sales affects the strength of new home sales.
Two series published by the National Association of Realtors (NAR) gauging the strength of the existing home sales sector are: pending sales and sales. The pending home sales index (PHSI) tracks signed (but not closed) sales contracts. The PHSI is an index that compares current monthly signed contracts to the average over 2001. The existing home sales (EHS) series is an estimate of the number of closed sales contracts in the month. The NAR reports that 80% of pending sales close within two months of signing and a significant share of the remainder close within four months, making the PHSI a reliable leading indicator of sales in the coming 4 months. Current readings in the PHSI point to strong sales for several months.
The Mortgage Bankers Association (MBA) publishes a series of weekly indexes tracking mortgage applications for a range of market segments. Since most home purchases are made with mortgages (70%-75%) the MBA’s series on mortgage applications for home purchases (as opposed to refinancings) is also highly correlated with existing home sales. The applications data is collected for the prior week and released on Wednesdays, providing a near real time tracking preceding NAR’s monthly release. Applications tracked sales closely through the housing boom and bust cycle. The relationship weakened between 2011 and 2013, a period of elevated all-cash purchases of existing homes (largely investors). The correlation improved in 2015 following a decline in all-cash purchases.
Purchase mortgage applications data already released for May suggest NAR’s upcoming release of May sales will show a continuation of recent strength, consistent with the PHSI.
These indicators provide both real time current and coming months’ signals about the strength of existing home sales and by extension insight into the prospects for new home sales.
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