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Pending Home Sales: Not The Full Snapshot Of Housing Picture

CNBC.com

A year ago we didn’t even report the “Pending Home Sales Index” from the National Association of Realtors. The index, which is based on contracts signed, not closings (closings are used for the monthly “Existing Home Sales” number), was always just kind of a barometer of the future, a guess at what the real sales number would be.

According to the Realtors: The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

So given that, it’s not surprising that the index is prone to corrections, as we saw today.The October number was revised from 87.2 to 89.9. The September number was also revised up.

I write all this because seconds after I reported these numbers, we went to colleague Rick Santelli at the Chicago Board of Trade to see reaction, and my question is: Should the markets really be moving on this particular index? It’s not a real sales number but a percentage move on an index number that was invented by the Realtors based on sales in 2001.

Rick said interest rates were moving on this number, especially on the revision. Now I know that these days everyone is looking for any tiny little data point that will give them some inkling as to where the housing market is going.

But housing is a behemoth that moves slowly and methodically, and one predictive number that doesn't gauge actual sales, shouldn't be taken as a snapshot of where exactly the housing market is going.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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