3/26/2024

3 key indicators for the real estate market

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Sales of new buildings in the US unexpectedly decreased in February 2024, while analysts expected diametrically opposite dynamics. Of course, these macro statistics are primarily of interest to investors whose specialization is the real estate market. However, the housing market generally reflects the health of the economy as a whole, so the following three indicators are important for all financial analysts to monitor.

New Home Sales

New home sales, also known as “new construction sales,” is an economic indicator published monthly by the U.S. Census Bureau. It reflects the number of transactions for the acquisition of newly built residential properties.

Investors watch this indicator closely as it serves as a lagging indicator of demand in the real estate market. In turn, housing demand directly influences mortgage rates, which are supported by factors such as household income, unemployment rates and interest rates in general.

The US Census Bureau publishes two versions of the indicator:

  • Seasonally Adjusted: Adjusts the effects of seasonal factors such as weather and is displayed as an annual total.
  • Non-Seasonally Adjusted: Reflects the number of transactions for a particular month.

Data on new home sales, like other internal indicators, are closely monitored by market participants. This is because changes in these indicators can predict broader changes in the economy, such as the onset of a recession or economic recovery.

Seasonal adjustment of data is designed to eliminate the influence of factors such as seasonal weather fluctuations or the general business cycle. This allows market participants to gain a more accurate understanding of the underlying demand for new homes, independent of other economic factors.

Existing Home Sales

The National Association of Realtors (NAR) publishes a monthly report on existing home sales. This report is based on closed residential real estate transactions and is a lagging indicator as housing choices are often driven by changes in interest rates.

According to NAR, reporting of most home sales occurs after the closing. This means that pending sales that are under contract are not taken into account.

Most residential real estate transactions involve a mortgage, which can take anywhere from 30 to 60 days to complete. Because of this, existing home sales data includes contracts that were signed at least a month or two before the report was released.

Information on new homes also comes from new building permit data at the state level. The house can be at any stage of construction. Thus, about 25% of houses are sold at the time of completion of construction. The remaining 75% is divided equally between projects not yet started and those under construction.

Pending Home Sales Index

The Pending Home Sales Index (PHSI) is an indicator also developed by NAR. It tracks the number of residential real estate transactions that are under contract but not yet completed.

PHSI is a leading indicator of future existing home sales. The average time from signing a contract to closing a deal is four to eight weeks. Since 2001, NAR has analyzed PHSI data.

PHSI measures the number of properties for sale, the number of buyers and realtor activity.

Because the PHSI is an index developed and published by NAR, it primarily focuses on measuring Realtor activity.

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