Housing Conundrum

After Existing Home Sales' (EHS) sequential m/m decline in March, many traders started thinking that this year will look just like 2011. But today's Pending Home Sales Index (PHSI) data may give the housing the benefit of the doubt. 4.1% m/m increase elevated PHSI passed the century mark for the first time in two years. (100 is a measure of PHSI "healthy contract activity", I guess it is somewhat similar measure to 50 for PMI, which is +/- line)

So we have a divergence in March closed vs pending contracts (as if we needed another one). Adding to the conundrum are conflicting comments from National Association of Realtors (NAR) itself - the aggregator of data. From today's PHSI report they seem to have a clue that “The housing market has clearly turned the corner. Rising sales are bringing down inventory and creating much more balanced conditions around the county, which means home prices will be rising in more areas as the year progresses”. Ironically, NAR blamed lower March EHS on none other than declining inventory. Here is what NAR said in its EHS report: “We were expecting a seasonal increase in home listings, but a lack of inventory has suddenly become an issue in several markets with not enough homes for sale in relation to buyer interest. Home sales could be held back because of supply factors and not by demand – we’re already seeing this in the Western states and in South Florida.”

Also, we have to take into consideration the fact that contract cancellation rate has skyrocketed lately, standing at whopping 33% in January of 2012. NAR has decided to stop collecting that data in March: "We are no longer publishing data on contract cancellations because many buyers are staying in the market and offering another contract, and sales have been holding up much better than the fallout rate would imply". I am dismayed! So now this is no longer relevant? Let's just omit every data point that looks out of whack from now on!

I suggest we wait for EHS report on May 22 to draw our own conclusions. If we see another m/m decline, housing market will look doomed for sure.

click on chart to enlarge