Pending Home Sales is an index created by the National Association of Realtors (NAR) which track the homes sales in which a contract is signed but the sale has been
not yet made. Released during the first week of each month, the index is based on signed real estate contracts for existing single-family homes, condos and co-ops. A
pending sale is not counted as a sale until the transaction is closed. Hence, one must understand that pending home sales index is a leading indicator for existing
home sales, not new home sales. It only helps to predict actual home sales activity as pending home sales generally become existing home sales one to two months later.
The index not only provides a gauge for housing demand, but also economic strength. An increase in new and pending home sales would imply that demand for housing is
increasing. Other factors remaining constant, this would imply that the economy is recovering as people would purchase homes only when they are confident about their
prospects and the country's economic prospects in general. So, housing is a very important consumer confidence indicator.
An increase in home sales shows that the economy is growing, and other things remaining constant, the Fed would curtail its economic stimulus program. This would mean,
other factors remaining constant, there would be lower liquidity in the financial markets, interest rates would rise, and bond prices would fall.
Housing also impacts several other sectors as an increase/decrease in demand would impact construction companies, home furnishing and appliance firms, would create
jobs in other sectors or otherwise, effectively creating a multiplier effect throughout the economy.
Increase in the index shows that people are in good financial positions to purchase new homes. Furthermore, the multiplier effect can be seen from the realtor's point
of view and also from the home buyer's point of view. Each time a home is resold, it will generate income for the realtors. Increase in income will lead to more
consumption opportunities. As for the home buyers, consumer spending will also increase since they will have to purchase furniture and electrical appliances to furnish
the new home. Trends in the pending sales data also has direct influence on stocks of home builders, mortgage lenders, and home furnishing companies.
A number of studies have attempted to quantify the "multiplier effect" housing has on the broader economy. The National Association of Realtors (NAR) estimates the
multiplier effect to be between 1.34 and 1.62 in the first year or two after the initial housing purchase. This means that each dollar increase in direct housing
activity will increase the overall GDP by $1.34 to $1.62.
Pending home sales rose sharply in May, with lower mortgage rates and increased inventory accelerating the market, according to the National Association of Realtors.
All four regions of the country saw increases in pending sales, with the Northeast and West experiencing the largest gains.
The Pending Home Sales Index,increased 6.1 percent to 103.9 in May from 97.9 in April, but still remains 5.2 percent below May 2013 (109.6). May's 6.1 percent increase
was the largest month-over-month gain since April 2010 (9.6 percent), when first-time home buyers rushed to sign purchase contracts before a popular tax credit program
Despite the positive gains in signed contracts last month, the affordability and access to credit is still an area of concern for first-time home buyers, who accounted
for only 27 percent of existing-home sales in May and typically carry student loan debt and lower credit scores.
The next Pending Home Sales Index will be on July 28, which would provide a broader picture as to increase or decrease of overall sentiment in Housing Market.