When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a "pending home sale." The majority of pending home sales become home sale transactions, typically one to two months later.
NAR now collects pending home sales data from MLSs and large brokers. Altogether, we receive data from over 100 MLSs & 60 large brokers, giving us a large sample size covering 50% of the EHS sample. This is equal to 20 percent of all transactions.
There are a few housing indicators in existence today (e.g., Housing Starts, Mortgage Applications, New-Home Sales) that are thought to be leading indicators. However, the statistical relationship between these purported leading indicators to existing-home sales is less than satisfying. For example, new-home sales, which account for 15 percent of transactions, are considered a leading indicator because they are based on contracts signed in the prior month, however, the sample is small so the data is more volatile and it takes many months to establish a trend.
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).
Not all pending home sales go to closing. A certain percentage of properties that go under contract are cancelled (or fallout) before ever going to settlement.
Since the Index is based on aggregated trends in the data, the fallout rate will not skew the index unless there is an abnormal spike or decline in cancellations. NAR will monitor the fallout rate by observing selected MLSs each month. If there is an abnormal change in the trend, NAR will make adjustments to the index to correct for these distortions.
An index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed. Coincidentally, 2001 was the first of four consecutive record years for existing-home sales. 2001 sales are fairly close to the higher level of home sales expected in the coming decade relative to the norms experienced in the mid-1990s. As such, an index of 100 coincides with a historically high level of home sales activity.
Upon more comprehensive sampling, NAR will explore converting the index into an actual pending home sales value. In addition, as the sample size expands, NAR will look to report pending sales information for regional and state markets.