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Pending Home Sales - Spin Cycle Set on "High"

Monday, May 4, 2009, 3:37 PM

Once again we have been treated to a form of news spin that borders on propaganda.

This time the information comes from the National Association of Realtors, or NAR, a group which long ago fell out of my favor for their tendency to churn out poor quality sampled “data” that was invariably out of step with reality by being overly positive.  Errors happen, but when they are always in one direction, they cease to be random errors.

After the NAR put out an uninterrupted string of misleading data during the popping phase of the housing bubble you might think that the US media would be a little bit more cautious running NAR “data” without providing some sort of context or caveats. You’d be wrong.

Here’s the latest:

Pending home sales jump 3.2%

NEW YORK (CNNMoney.com) -- Is the housing meltdown ending? Pending home sales rose in March for the second consecutive month and are up year over year.

The consensus forecast of industry experts polled by Briefing.com had predicted no increase in the index.

As noted here previously, existing home sales always rise between February and March. Always. That would be indicated by the black lines in the chart below (which has not yet been updated for the March 2009 data).

 

I am at a loss to figure out which “industry experts” had predicted no increase in the index for March over February.  If I can figure out who these experts are I will send them this chart in the interest of helping them improve their craft.

Here’s a tip for them so they don’t get surprised again next month: April will be higher than March!!   And May will be higher than April...and so on.

Of course as readers of this site know the name of the game is not “accuracy” but rather “beat by a penny” which refers to creating a positive spin on any data no matter how bad it really is.   By setting expectations so low that they are sure to be beaten, a positive and bullish response can be elicited in the financial markets by the “unexpectedly good news.”

It also bears noting that the NAR data we are discussing here was for something called “pending home sales” whereas the chart above is for existing home sales. The difference is that pending home sales is a sampled measure of contracts signed which then turn into home sales typically after a 45 day delay.

However, if done well, these two indexes (sales and pending) should line up quite nicely with a small offset of ~45 days.

Another problem with the pending home sales is that the data includes foreclosures and distressed sales and because of this has, in the past, correlated poorly with actual increases in home sales.

As far back as last August, at least one journalist (Rex Nutting of Martketwatch) caught onto this phenomenon and I thought we’d perhaps moved past the stage of being confused about the reliability or trustworthiness of the Pending Sale index:

The realtors' pending home sales index rose 5.3% in June, a signal that the number of sales closed in July should be higher.

The index is supposed to forecast actual sales a month or two ahead; in the past seven months, the pending index has correctly forecast the direction of actual sales in the next month, if not the magnitude of the change.

It's wise not to get too excited about this increase: These data are extremely volatile from month-to-month, and a big increase in the pending index doesn't necessarily translate into a big increase in the existing-home sales in the next month.

Signing a contract to buy a home is not the same as actually buying it. Many sellers may be desperate to accept any bid, no matter how unlikely it will be that the buyer will get financing.

The reason that the bolded sentences are so important here is because the number of foreclosures and distressed sales are a much higher proportion of pending sales than they were a year ago and because loans are much, much harder to get these days, especially with the new 20% down requirement that many lenders have recently implemented.  While I have no doubt that home sales will pick up at some point in the future, I am also confident that there will be a few "false starts" along the way.  

Knowing when real, organic house buying is on the upswing requires knowing something about the proportion of foreclosure and distressed sales vs. "real" sales.  For some reason this information is not well publicized nor talked about.

Seeking this information I read 5 separate articles in five different quality publications today about the NAR pending sales number and not one included this information and none inserted any sort of a qualifying statement about the limitations and past failures of the index.

Instead we saw statements of opinion such as this one in Bloomberg:

“People are worrying a bit less about a depression and starting to see signs of recovery,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut.

At this stage the absence of any caveat or alternative opinion is a red flag for me.  We know enough about this data to properly explain its limitations and past failures yet that is rarely done.  By leaving this information out I question the intent and the motives of the publication.

The reason I care about this is because I hold a belief that it was a similar tendency to feed ourselves a diet of poor information that led to this crisis in the first place.  I am at a loss to understand how continuing this pattern serves us at this stage.

But spring is in the air and “green shoots” are on the menu so I say let’s enjoy the optimism while it lasts. For those who kicked themselves for riding their stock holdings down, this is a great time to lighten up.

Consider it a gift from the folks over at Spin-Cycle central.

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10 Comments

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Pending Home Sales – Spin Cycle Set on “High”

 The NAR is the worst offender in blatant data manipulation, outside of the government itself, of course. Thanks for your spin-control efforts.

DavidC's picture
DavidC
Status: Silver Member (Offline)
Joined: Sep 29 2008
Posts: 243
Re: Pending Home Sales – Spin Cycle Set on “High”

A heartfelt 'Thank you' for this Chris, and also for your 'Trust Yourself' post.

Sometimes, when I really do wonder if we are into 'The New Paradigm' (my terminology) where common sense and truth are out of the window and whether I'm missing something, I am reassured by reading your posts.

We're being treated like children being fed sugar coated figures (for whatever reasons) - I, for one, would prefer to know the facts and respond to them accordingly in an adult manner (which doesn't mean unemotionally, but does mean in an emotionally adult sense). At the moment, other than from sites such as this, it is almost impossible.

Davos is also doing a great job with the daily digests - many thanks Davos.

David

Juvysen's picture
Juvysen
Status: Martenson Brigade Member (Offline)
Joined: Sep 30 2008
Posts: 121
Re: Pending Home Sales – Spin Cycle Set on “High”

I heard this on the news recently and was shocked.  Thanks for clearing up the discrepency.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Pending Home Sales – Spin Cycle Set on “High”

 A liefetime of lies dissapointments: Easter Bunny, Santa Claus, the Tooth Ferry, Cupid and now this 

 

Thanks Chris, as always super work!

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: Pending Home Sales – Spin Cycle Set on “High”
Quote:

For those who kicked themselves for riding their stock holdings down, this is a great time to lighten up.

That would be me. Sigh.

Quote:

Consider it a gift from the folks over at Spin-Cycle central.

A rolling blackout would be my gift back to the folks at Spin-Cycle Central.

mee's picture
mee
Status: Member (Offline)
Joined: May 5 2009
Posts: 1
Re: Pending Home Sales – Spin Cycle Set on “High”

well , im ready to purchase a home now !  im so happy , jim cramer on the cnbc says housing will bottom on june 30th . ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, WOW jim and cnbc definitely have the spin cycle set on high !   for LESS spin watch fox news ! thats my opinion !

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
Flip side of the housing. .

My take on the housing market is - since the stock markets, precious metals and "main markets" seem so manipulated, then this is my chance to buy that second home for retirement. I (for one) will never have a better buy option and less competition . . .and the price is right. Even if the property looses value - the rent monies it could bring in will not change.

EGP

Angry Saver's picture
Angry Saver
Status: Member (Offline)
Joined: Apr 23 2009
Posts: 11
Re: Pending Home Sales – Spin Cycle Set on “High”

Chris,

I think it is important to understand that sales do NOT accurately measure underlying demand, especially in the short term.  The distinction between sales and actual demand is citical.  Consider: 

Per the Census Bureau, in 1970, 9% of all U.S. housing units were unoccupied.  In 1980, again, 9% of all U.S. housing units were unoccupied.  Fast forward to 2009.  In round numbers, the U.S. currently has 130 million housing units of which 111 million occupied.  That leaves 19 million unoccupied homes (15%)! 

Many millions of homes built during the housing bubble were the result of wild speculation, aided and abetted by financial propaganda and fraud.  Greenspan's negative real interest rates were also a root cause.  Mainstream eCONomists deliberately ignored and distorted the pertinent data. 

Imo, change in occupied housing units is a much truer measure of demand than sales.  Sales represent change in ownership, NOT demand.  Some would argue that as the country grew wealthier, demand for second homes also grew.  Current circumstances debunk that line of thinking. 

When the system requires credit growth at any cost, that is what you eventually get.  Tens of millions of lives have been financially ruined.  What a sham(e).

You seem like a good egg Chris.  Keep up the good work.

Regards,

Angry Saver

 

 

 

 

 

 

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Pending Home Sales – Spin Cycle Set on “High”

 Angrey Saver:

Very good merits, especially the rate of vacant homes now and over the years. And your right, without the NINJA and alike loans barring some nutty government program - banks won't be loaning to a lot of folks in the future.

BTW I like the way you spell eCONomists!

I suppose this is where they get their name..... "Bernanke: "Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels."

WendyT's picture
WendyT
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 39
Re: Pending Home Sales – Spin Cycle Set on “High”

<blockquote>We're being treated like children being fed sugar coated figures (for whatever reasons) - I, for one, would prefer to know the facts and respond to them accordingly in an adult manner (which doesn't mean unemotionally, but does mean in an emotionally adult sense). At the moment, other than from sites such as this, it is almost impossible. </blockquote>David,

For a bit of Emergency Room black humor, see "Nation Ready To Be Lied To About Economy Again," over at the Onion.

http://www.theonion.com/content/news/nation_ready_to_be_lied_to_about

 

Wendy

 

 

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