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Take a Peek into the Future Housing Market

Using pending sales as a leading indicator of sales activities and house prices

Bin He    |    Housing Trends

It’s well understood that even great economists can’t predict the future of home prices. But can pending home sales prices offer a preview into what home prices will do? A CoreLogic analysis indicates that just might be the case. A listing on a home becomes “pending” when an offer is accepted and a contract is signed, after which it takes, on average, one to two months to close the contract. But not every pending home will result in a sale transaction due to various reasons such as withdrawn offers or the buyer’s inability to get a loan. Still, the information contained in pending sales provides a good indication of the sale activities and house price trends over several months’ time. Let’s consider the usefulness of pending sales using the San Diego Core Based Statistical Area (CBSA) as an example. Figure 1 shows the pending listing inventory and the sold listing inventory [1] in the San Diego market, both of which follow each other very well.  If we take a closer look, the pending inventory seems always to peak one month earlier than the sold inventory.

Month-over-month Inventory Change

Figure 2 shows the month-over-month (MoM) change for the sold inventory and one-period lag of pending inventory since January 2012. As can be seen, the two different time series are almost on top of each other. The same can be said for the mean price too. As Figure 3 shows, the one-period lag of mean pending price MoM change is almost the same as the mean sold price MoM change. Overall, the pending activity seems to be a good leading indicator of the sold activity.

Month-over-month Mean Price Change San Diego CBSA

Now let’s compare that to the CoreLogic Home Price Index (HPI), a repeat-sales index that is used by lenders and/or investors as a metric to make business decisions. From Chart 3 we know that the mean pending price leads the mean sale price, so chances are we can peek into the future CoreLogic HPI by looking at the pending price--even though technically it is not an apples-to-apples comparison because one is the mean price and the other is a repeat-sales index. However, if the correlation between them is high, it provides a basic idea of future HPI movement from the pending price. Chart 4 shows the high correlation between MoM HPI and lags of MoM mean pending price with lag 1 and lag 2 of the mean pending price showing the highest correlation with the HPI. This means that reviewing the change in the mean pending price can provide good insight on the movement of the HPI several months before it is even published [2].

Correlation between HPI MoM and Mean Pending Price MoM lags

We are living in a fast-changing world; information that offers some ideas of future HPI and sale activities is hard to come by. By leveraging pending sale information, investors and financial institutions can stay one step ahead and be alerted to what may happen in local housing markets.

[1] Data used in the analysis is from CoreLogic ListingTrends

[2] Granger Causality was performed, and it was confirmed that the mean pending price and HPI affect each other. Testing results are available upon request.

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