When home sellers accepts a contract on MLS-listed property, the property's official status changes from "Active" to "Pending".
By measuring the number of "Pending" homes nationwide, the National Association of Realtors® publishes its once-monthly Pending Homes Sales Index.
The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use.
This is because of the index's methodology:
- It doesn't measure new construction homes
- It doesn't track For Sale By Owner properties
- Its sample set covers just 20 percent of MLS transactions
In addition, in a tough mortgage climate such as the one we're in now, a greater percentage of pending sales will fail to close at all because of lack of financing.
The Pending Home Sales Index still has its place, however -- it's a terrific look at the buy-side demand for homes.
When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength. After all, pending sales can't happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.
This is why the June's Pending Home Sales report is so intriguing.
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.
Now, again, the uptick doesn't mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding "now" to be a good time to buy real estate.
That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn't usually far behind.