Tuesday, December 11, 2007

Wait Just a Minute on the Increase in the Index of Pending Home Sales

I heard yesterday that the markets and real estate industry were all excited about the increase in the Index of Pending Home Sales. This index is based on contracts signed. Walk into any realtors office or mortgage banking office and find out how many signed contracts are approved for financing today. Don’t know what the number is but it is lower than it used to be. If you don’t believe me then maybe you will believe someone in the biz. From CNNMoney.com:

Mike Larson, a real estate analyst for independent research firm Weiss Research. "And keep in mind that unlike in the past, more of these pending sales won't actually close as buyers have trouble finalizing financing. I think it's going to be a muddle-through market for a while here."

Furthermore, the chief economist from the NAR made the following comment (from the WSJ):

The Realtors' chief economist, Lawrence Yun, said the data suggested the worst declines are over. Lehman Brothers economists continued "to be negative on housing."

How gullible does Mr. Yun think we are? How does he determine that the “worst declines are over”? A change in slope (inflection point for the math geeks) gives no information about the next inflection point or the on-going slope of the time series. This is a nice way of saying that statistics needs to be combined with one's knowledge of the subject so conclusions can be drawn.

However, if you look at the current market conditions such as foreclosures, declining home sales, continuing lay-offs in the banking industry (these people have to turn a profit as opposed to chat about data), weak new home sales, etc. it is difficult to support the idea that “worst decline are over”.

By the way, below is the graph of the Index of Pending Home Sales (from the WSJ). You can make up your own mind. (Double click on image to enlarge.)

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