How to Understand the Pending Home Sales Index

The Pending Home Sales Index is a once monthly published account of all homes that have changed status on the MLS from an active listing (or home for sale) to a pending sale (or home under contract). By accounting for the number of homes pending nationwide the NAR publishes it's index.

The real estate industry views the index as a sign of future home sales. They do this with the assumption that 80% of all homes pending will close within 2 months and the remainder will close with 4 months.

But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use. This is because of the index's methodology: 1. It doesn't measure new construction homes 2. It doesn't track For Sale By Owner properties 3. Its sample set covers just 20 percent of MLS transactions

While the PHSI is an excellent way to guage demand for homes it fails to take into account other important factors. In a credit crunch like we are in presently many transactions never close due to financing problems.

We can guage the real estate markets strength based on the Pending Home Sales Index by whether it rises or falls. When it is rising we can be sure that there are presently more buyers in the market and usually more demand brings price increases.

For example, in June 2008, the 2nd time in three months - the PHSI posted a large increase even though economists expected a loss. The Pending Home Sales Index's rise indicates that the overall market is experiencing a revival for that quarter.

Again, this does not show us exactly how many of these transactions have closed. We only know from this data that the market demand is increasing since more buyers are putting houses under contract. And typically when buyer demand is increasing then we can assume the real estate market will not be far bhind.