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Pending home sales pick up in January 2015

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Pending home sales index

The PHSI (pending home sales index) is published monthly by the National Association of Realtors, or NAR. It’s considered a leading indicator for the housing market. It measures activity in housing contracts signed for existing single-family homes, condominiums, and co-ops. It takes one to two months for a contract signing to get converted into a sale. As a result, this indicator leads NAR’s existing homes data by that period.

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When a sales contract for a home is accepted, it’s recorded in a Multiple Listing Service, or MLS, as a pending home sale. NAR collects this data from over 100 MLSs and large brokers. The sample size used by NAR is about 50% of the existing home sales sample and accounts for nearly 20% of all transactions.

More contract signings mean more business for homebuilders and retailers including PulteGroup (PHM), Toll Brothers (TOL), and Lowe’s (LOW). Associated ETFs like S&P SPDR Homebuilder ETF (XHB), ~10% of whose assets are invested in these three companies, can also be expected to do well if these companies do well. Meanwhile, ~20% of iShares Dow Jones US Home Construction Index Fund’s (ITB) assets are invested in these three companies.

January 2015 report

The pending home sales index rose by 1.7% in January 2015 to 104.2, up from an upwardly revised level of 102.5 in December 2014. This was the index’s highest level since August 2013. Compared to last year, the index was up 8.4%. A slight improvement in credit conditions, a firm labor market, and a subdued rise in home prices have helped sales bounce back even in tight inventory conditions.

Lawrence Yun, NAR’s chief economist, said, “All indications point to modest sales gains as we head into the spring buying season.” His statement relates to a fall in all-cash sales and sales to investors, both of which have fallen since last year, which bodes well for traditional homebuyers.

Apart from the Midwest, the other three regions reported a rise in sales. The largest increase was seen in the South, where the index rose 3.2% from December. Meanwhile, the Midwest saw the index decrease by 0.7% month-over-month.

In the next article of our series, we’ll explore reasons why consumers are less confident about the US job market.

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