Pending Home Sales continue to fall; NAR is optimistic

The National Association of Realtors (NAR) released the Pending Home Sales figures for January 2008. This is a measure of contracts that were signed in January. When a home closes then it will turn into an Existing Home Sale. The Pending Home Sales Index on a seasonally adjusted basis was unchanged from December 2007 to January 2008 but was down 19.6% from January 2007. The graph to the right compares Pending Home Sales and Existing Home Sales on a Seasonally Adjusted basis. The Pending Home Sales are shifted 2 months forward on the chart. You can click on the chart for a larger view.

Here is a graph showing Pending Home Sales not seasonally adjusted. Pending Home Sales for January 2008 were 15.7% lower than January 2001. 15% off of 2001 sales levels would equate to around 4.6 million existing home sales for 2008. Here is the NAR’s current forecast: “Existing-home sales are forecast to remain flat around an annual level of 4.9 million in the first half of the year before improving to a 5.8-million pace in the second half. With a weak first half, total sales for 2008 are projected at 5.38 million”.

Ultimately the amount of sales will depend on the how motivated the buyers and sellers are. If sellers are aggressive on lowering prices, then demand could pick up. This leads to the NAR’s most interesting and boldest prediction for 2008. The NAR predicts that ”The aggregate existing-home price is projected to decline 1.2 percent to a median of $216,300 this year, and then increase 3.5 percent to $223,800 in 2009. “ The aggregate existing-home price for 2007 was $219,000. A decline of 1.2% doesn’t sound too bad especially if prices rebound in 2009. The only problem is that prices have already declined to $201,100 (median existing homes sales price for January 2008). They are also projecting for the aggregate existing home price for all of 2008 to be at $216,300 (not just the month of December).

The aggregate existing home price for 2006 was $221,900. It went up as high as $229,000 in June of 2007, but then has steadily declined to $201,100 in January 2008. The Case-Shiller CME futures are projecting about a 6.5% decline from January 2008 to December 2008 (this previous post talks about the Case-Shiller CME futures).

If existing-prices declined by 6.5% they would be at around $188,000 by the end of this year. If prices steadily declined to that level, the aggregate existing home price for 2008 would be in the middle at around $194,500. This would be a decline of 11.4%. One way for the aggregate prices for 2008 to end up at $216,300, would be for home prices to instantly jump from 201,100 to around $217,000 and stay flat for the duration of the year. Another way to end up at a median of $216,300 would be for prices to move up from 201,100 in an orderly manner and end up at $230,000 by December 2008, then the median would be around $216,300. Prices would have to follow an inverse pattern in 2009 to go from $230,000 and fall steadily to $218,000 to end up with a median of $223,800 (to match the NAR’s 3.5% forecasted increase).

The NAR is notorious for revising their overly optimistic forecasts. Here are some quotes from Calculated Risk back in October 2007.

The comedians at the National Association of Realtors (NAR) revised down their forecast today for existing home sales in 2007 again. Their current forecast is for sales to be 5.78 million in 2007, down for 5.92 million last month. Compare this to their original forecast from Dec '06 of 6.4 million units in 2007. (My forecast was for existing home sales to be between 5.6 and 5.8 million units).

The NAR forecast is still too high, even after eight straight months of negative revisions. Luckily for the NAR, they still have two more downward revisions to go.

Note that Existing Sales ended up at 5.652 million for the year (Calculated Risk’s projection was very accurate).

It will be interesting to see how and when the NAR’s forecast of a decline of 1.2% in sales prices gets revised. Hopefully this was just a math error on their part and not an attempt to mislead the public.

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