The National Association of Realtors (NAR) reports both current data and lagging data.
But if you look only at the old data, it may cause you to make bad real estate investment decisions.
With years of professional experience in the trenches of the real estate finance industry, and as an erstwhile homebuyer and seller, I know that the numbers reported by the NAR matter. But some of its data is better than other.
Some of the NAR data is stale, old data that reflects what was happening in the market months ago. That may not matter during a long stable trend. But when the trend is changing, like now, being a few months behind the curve can make a big difference. As prospective home buyers, real estate investors, and stock investors, we need real time data that’s not behind the curve.
As stock investors we need to understand real estate trends because they may lead the market. And as we all know, problems in real estate finance have led to financial crashes, which were largely expressed through falling stock prices.
In my decades in the real estate and mortgage businesses, and in using that data in the 17 years since I left the business, I know that the NAR’s database is the most broad-based, in depth, and timely data of its kind. Yes, it is reported in a biased and self-serving way, but I don’t care about that. I just crunch the numbers.
However, some of the data NAR reports is not current, and that can be misleading. We need to be sure that we are using the most current data.
The NAR has a report that it calls “Existing Home Sales.” But existing Home Sales reports the number of prior sales contracts on existing homes that were formally closed, meaning the date when all the t’s were crossed and i’s dotted. That normally happens a couple of months after the actual sale took place. By the time it’s reported, it’s a full 3 months or more behind the time of the actual sales, which is when the contracts were signed.
But everybody in the business, including buyers, sellers, and agents, recognize that when a property goes under contract, it is “SOLD!” The few sales that don’t close, go “BOM,” back on the market, and usually sell again quickly, most often at the same or even a higher price.
Meanwhile, the NAR has real time data on sales in its MLS databases. Agents enter those sales in those databases the minute they go under contract. The NAR aggregates that data and reports it about 4 weeks after the end of the month being reported. They call that Pending home sales (PHS).
Use of the word “Pending” makes it somehow seem like it’s not the real thing, when it is. It is the point at which the buyer and seller agree on price and terms. The rest is just a formality that takes time. The market is made when the contract is signed, not when it goes to closing.
The other data report, Existing Home Sales, is a lagging measure that only tells us where the market was 3-4 months ago. If we want to know where the market is now, our focus should always be on what the NAR calls Pending Home Sales.
The ratio of closings (EHS) to the prior 2 months sales contracts is useful data. We’ll get to that later, but first, let’s examine the most recent sales contract (PHS) and price data…