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Brace for Disappointing Existing-Home Sales

Tomorrow morning's existing-home sales report for June from the NAR (National Association of Realtors) is widely expected to receive a boost from the expiration of the federal home purchase tax credit at the end of that month. However, analysis of pending home sales data (also from the NAR) leads to a projection for a low number of existing home sales for June.

The NAR describes the value of pending home sales data as follows:

Specifically, Pending Home Sales become Existing-Home Sales one-to-two months later. This means that we can use an index derived from Pending Home Sales to predict actual home sales activity.

Since pending home sales measure actual existing-home sales, the PHSI provides an accurate and reliable indicator of future home sales activity. Our sample shows that over 80% of all pending home sales go to settlement within a 2-month time-period (and a significant share of the rest close in month 3 and month 4).
Because of the expiration of the home purchase tax credit, some closings may have been accelerated into June. That occurrence could introduce a bias into the historical correlations. Even so, the projections from those correlations are sufficiently low that such bias could still leave existing home sales below what many are expecting.

The History

The only significant correlation that this analyst finds in recent years is between pending home sales and existing-home sales one month later. The correlations two months or more later are near zero or negative. However, that correlation is weak (correlation coefficient = 0.61). This has prompted further analysis.

Both existing home sales and pending sales data is quite noisy. Because of this, the effect of using two-month moving averages to smooth the noise has been examined. The correlation coefficient is much improved to 0.84. The result of a correlation plot for data from January 2008 through May 2009 is shown in the graph on the next page.
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