My Mortgage Blog

The economic indicators most relevant to the real estate market provided a small but mildly mind-boggling seminar last week in how not to get taken in by the data.

The week began well, with the important report on the number of sales of existing homes showing a convincing 6.1% rise in March over April's total. Bloomberg commented that this was the best rate to be achieved since September 2013.

It was tempting, of course, to take the evening off and raise some bubbly, confident that the real estate market might at long last be peeling its face off the ground. The proof of how sustainable this advance might be was, of course, not long in coming. The National Association of Realtors released its monthly pending sales index and, sure enough, which had slipped and stubbed its toe a couple of months before, was found to have risen by a strong 3.1%.

Okay, what does this mean to us? (Pardon me if what I say seems obvious, but it's important for us all to be on the same page here,)

The figure for existing home sales that is computed monthly by the National Association of Realtors gives us a decent idea of how many sales of existing--as opposed to newly-constructed homes--closed in a given month. That "closed" as in the deal is done, escrow closed, house keys handed to the new owners.

The number of pending home sales reported on by the National Association of Realtors, on the other hand, involves contracts for purchase. These are not home sales that have closed. They have recently opened and will turn into completed sales when the necessary financing has been arranged and other details of the escrow are handled. Until then, what we have is a probable sale, really--one that could fall out of escrow and sometimes does.

So when we talk about the increase in the number of sales of existing homes vis-a-vis the number of pending sales, you can see that we're talking about very different things and that we could easily confuse the dickens out of ourselves if we expect these two figures to mean the same thing. It really isn't correct, therefore, to say that the real estate market has improved greatly because, after all, pending and existing sales are both higher. In reality, the pending sales figure gives us rough information on the future, and the number of existing home sales tells us about the past. This is helpful to keep in mind.

Okay, but what happens when the new home sales figure is published and we, inevitably, compare it to the existing home sales figure. Well, in March, much to our consternation, new home sales plummeted in March, falling by 11.4% from the prior month. Importantly, though, if pending sales and existing sales are apples and oranges, new home sales are pineapples. They're just very different pieces of data.

Again the main difference--though the whole story is much more complex than this--has to do with time. Where pending home sales have just entered the closing process and existing home sales have completed the process, new home sales involve a baffling mix of processes in order to reach their conclusion. For one thing, the buyer of a new home often purchases a bit of dirt, a floor plan, a set of blueprints, a program for the building of the home. It could be several months before the home is finished and ready for occupancy, and this is very important. Why? Because the selling price and quantity of sales of new homes may seem to remain on the starting blocks quite a while after most existing homes have already run the race to the close of escrow. That means new homes are often slower to reflect the changes in the real estate market than are existing homes or, of course, pending sales.

Now, as I've said, there's really a lot more to it than this. New home sales data seem always to be much more volatile than existing home sales, which are done deals, far less subject to change.

And one of the big problems here is that most newspaper reporters who help to guide our understanding of how strong the real estate market is don't consider--in some cases, don't fully understand--the nuances of these different kinds of sales reports. And we end up thinking the sky is falling if new home sales are much gloomier than are existing home sales.

It may, therefore, still be a good time to get out the bubbly. All told, market data looks much better today than it did a couple of months ago and the markets aren't as worried that the Fed may begin to raise rates because it probably won't.

We're in a decent position for the time being, therefore.