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Understanding the Pending Home Sales Index

Sep 17, 2008
The National Association of Realtors measures the number of pending homes nationwide on a monthly basis. They do this by tracking when there is a status change from an active listing to a pending sale via the Multiple Listing Service. This is called the Pending Home Sales Index.

The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.

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.

The Pending Home Sales Index is an excellent way to view the overall markets strength. When the PHSI is moving up we know that there are more buyers in the market for homes and typically with more demand comes higher prices.

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.

Since the PHSI doesn't indicate closed transactions we only know that demand is greater and that buyers are finding this a good time to move forward with a purchase. This tracking makes the Pending Home Sales Index a worthwhile source of market data since we know that greater demand will usually result in higher real estate prices in the future.
About the Author
If you are in the market to Buy a Home then visit Rob Kosbergs' Detailed FREE Guide on Buying your Dream Home with a No Money Down Mortgage or for up to date Mortgage info visit my Mortgage Blog
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