By Ryan Casey Stephens, FPQP®
Special Contributor
Each week in December we’ll take a deep dive into one report that moves markets and impacts mortgage rates.
With Christmas behind us, it’s all eyes on New Year’s Eve. I love this season because we focus on the year behind us, we party with those who mean the most to us, and we look forward to the blank canvas that lies before of us.
Economic reports can be used to do a little of this too: some look back at where we’ve been, while others look ahead. Pending Home Sales, which will be familiar to many in this audience, is one of the most important indicators of the health of the housing market to come. We’ll get to see November’s data this week, so let’s take a deep dive into the report in the final Three Things to Know of 2022.
Who, What, and How?
Released on the final week of each month, the Pending Home Sales Index (PHSI) is the number of homes under contract in the United States for the month prior. That means this month, December 2022, we’ll see data for November 2022. It’s important to note that the report is a survey and isn’t all-encompassing. The National Association of Realtors uses data from more than one hundred MLS services that generally make up about 20 percent of housing activity. The homes within the sample include single-family residences and condos.
Not to Be Confused
A closely-named cousin to the PHSI you should be aware of is Existing Home Sales which tracks closed sales and prices across the four major regions in the U.S. So why don’t economists prefer to track closed sale data? After all, Pending Home Sales measures contracts, and don’t some home sales fall through after initially being under contract?
The short answer is that economists prefer recency. Not all lenders are as quick as your author here, and many of the homes in the Existing Home Sales report likely went pending two months prior. Buyers also make purchase decisions based on interest rates, so tracking pending contracts from the prior month gives us the best look into the health of the housing market for the next month or two.
Where do we go from here?
We’ll get November’s data this week, but the recent trend has been a rough one. The numbers have worsened each month since July, with October seeing 37 percent fewer homes under contract than one year prior. November and December are slower months to begin with due to the holidays. With the average rate still elevated above 6 percent, we can expect to continue to see dramatically less pending activity than one year prior, at least through December 2022’s data.
The exciting news is that this report will be one of the first signs of recovery for those of us who work in real estate. We hope that mortgage rates will soon begin to ease as the Fed pivots on lower inflation readings, at which point consumers might begin considering buying once again. The Pending Home Sales report will record that activity, and we’ll begin to see some positive movement month to month.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
