How to understand the Pending Home Sales Index

The National Association of Realtors measures the number of pending homes nationwide on a monthly basis. They do this by tracking when there is a status change from an active listing to a pending sale via the Multiple Listing Service. This is called the Pending Home Sales Index.

The NAR assumes that 75%-80% of all homes pending will close within 60 days while the remaining will close within 120 days. Thus it is considered a prediction of future home sales.

Though the index is intended to give a look ahead to future Home Sales it may not be very accurate due to several factors. 1. It sample about 1 in 5 MLS transactions 2. It doesn’t track for sale by owners. 3. It doesn’t account for new home sales.

Since many transactions do not close these days due to the mortgage crisis the PHSI may be skewed. it is, however, a great way to assess buyer demand for real estate on a month to month basis.

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.

In June — for the second time in three months — the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.

Again, this does not show us exactly how many of these transactions have closed. We only know from this data that the market demand is increasing since more buyers are putting houses under contract. And typically when buyer demand is increasing then we can assume the real estate market will not be far bhind.