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An Investor’s Guide to Housing Reports

Prices, starts, permits and more. Here's how to sort 'em out

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Existing Home Sale Reports

Pending Sales (B-): Pending sales represent the number of current contract offers in effect between home buyers and sellers, but which haven’t yet closed.

During the pending period, buyers are going through the financing process, and are having inspections, appraisals and surveys performed to assess the condition, value and parameters of the properties.

Unfortunately, many things can and do go wrong during this process. A lender may find reasons to deny the buyer’s financing. Inspectors may find structural problems in the home that change the buyer’s mind about the purchase. Appraisers may assess the value of the home much lower than the agreed-upon purchase price and the seller may be unwilling or unable to lower their price.

Any of these can be deal-killers. Therefore, using pending sales as a guide to the current or even future strength of the real estate market can often be misleading. In fact, in October 2011, some 33% of pending sales failed to close, a huge increase from the 8% that failed in October, 2010. This increase pinpoints the ongoing problem that tighter lending standards are having on the real estate market’s ability to gain any headwind.

Closed Sales (A-): Closed sales are finalized sales, in which property deeds are transferred from seller to buyer and the seller receives his money. Therefore, closed sales are a far more reliable indicator of the strength or weakness of the real estate market than are pending sales. It’s truly the one report that best represents the strength of the real estate market.

However, the validity of this report was somewhat damaged recently by the National Association of Realtor’s (NAR) admission that it misreported several years of numbers. Hopefully, that situation will be corrected.

Also note that the combination of pending and closed sales reports can confuse Wall Street into acting as if things are improving or declining. For example, we recently had a report of a better-than-expected rise in pending sales, and the Dow climbed 130 points on the news.

That strong pending sales report can prompt the analysts to adjust their numbers to expect a higher closed sales rate in the following month. But if a large percentage of those pending sales fail to close, the market will be disappointed, and analysts will then readjust their earnings expectations (and thus the stock prices) for the real estate-related issues.

Case-Shiller Indices (B+): The S&P/Case-Shiller U.S. National Home Price Index is a quarterly composite of single-family home price indices for the nine U.S. Census divisions, and is the most frequently reported home-price number to the financial markets.

It’s put out by Fiserv, an information management company, and Standard & Poors, which in 2002 jointly purchased Case-Shiller-Weiss, the originators of the indices, which measure repeat sales of the same homes to measure price fluctuations in the real estate market.

The Case-Shiller index is an important number, because it measures prices, and not sales numbers. This is another way to gauge the strength or weakness of real estate markets, because price increases usually precede sales increases, and price declines usually precede a drop in sales.

The reports include a national home price index, a composite index of 20 cities across the country, a 10-city composite index and individual indices for 20 different metropolitan areas.

But because real estate can be strong in some parts of the country, while other areas remain weak, the metro index numbers will sometimes clash with the national numbers, and investors may become confused about the larger picture. So the most accurate report for investors to focus on should be the S&P/Case–Shiller U.S. National Home Price Index.

A better-than-expected Case-Shiller number will frequently push the stock market higher. In addition, options and futures for the Case-Shiller index are traded on the Chicago Mercantile Exchange.

Article printed from InvestorPlace Media,

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