Over the next several months, there is going to be some confusion about how well the real estate market is doing. Some headlines are going to announce several consecutive months of increased sales. Other headlines are going to talk about a near total collapse in housing. Both headlines will be based on facts supplied by the National Association of Realtors (NAR). How can that be? How can data report that two opposite things are happening at the same time?
Let us explain. NAR will release two reports each month: the Pending Sales Report and the Existing Sales Report.
The Pending Sales Report (as per NAR)
The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The Existing Sales Report (as per NAR)
Existing-home sales are completed transactions that include single-family, townhomes, condominiums and co-ops.
The reason there will be confusion created by the media reports is actually simple to explain. There will be two different numbers reported by both reports each month.
- § The month-over-month (M-O-M) comparison and
- § The year-over-year (Y-O-Y) comparison
Normally, we would want to look at the Y-O-Y numbers in each report. However, these numbers are skewed because of the Home Buyer Tax Credit which was available to purchasers for the first four months of last year. Comparing contracts and sales with this time last year would be like comparing apples and oranges.
We strongly suggest that you look at the momentum shown in the month-over-month numbers. They accurately depict a surge in sales that we believe will continue throughout 2011. However, that does not mean price appreciation. Just as demand is increasing so is the supply of inventory. Price is determined by both supply and demand. We do not see any price appreciation until later in the year or early next year.
The market is coming back. Homes are selling. We have turned the corner and 2011 will be the year the market will normalize.
Source: KCM Blog