by Calculated Risk on 6/09/2008 03:08:00 PM

I've read a number of articles and blogs on the Pending Home Sales Index (PHSI) numbers this morning. I believe most of the analysis is missing the two key points.

Let's start with the usual caveat that this is just one month of data.

As noted earlier, the NAR Pending Home sales index (PHSI) showed a 6.3% increase in April as compared to March.

These pending sales (for April) are supposed to predict actual sales about 45 days later (about half for May, half for June). The May existing home sales report will be released June 26th, and sales for June will be released on July 24th. So we have to wait to see if there is a small increase in actual sales.

The following graph from the WSJ (with pending home sales advanced one month) shows that the existing home sales do track the PHSI pretty well.

Source: WSJ Real Time Economics

This is a typical (via the WSJ):

Pending home sales [were] well above expectations and the biggest monthly increase since December 2001. This index leads existing home sales by one to two months, and as such the April figure is another sign that existing home sales are leveling out. – J.P. Morgan Chase

Yes, the PHSI does suggest existing home sales will be higher in May and June than in April, but it doesn't mean sales are "leveling out".

Here is another view from CNBC: Housing Market Is Showing Signs of a Turnaround

We are seeing an acceleration in foreclosures. As foreclosures have taken off, they put pressure on prices. Banks have become more aggressive with sales on homes they have foreclosed," said Christopher Low, chief economist at FTN Financial in New York.

Low said the pickup in pending home sales could be a sign that the housing market could soon be stabilizing.

"Sales will stabilize in the next few months and that will set the stage for inventories turning to normal sometime next year and maybe even for prices to appreciate a bit," he said. "For now, prices will continue to fall. There is still an inventory overhang that will take 18 months to work through. The end game of the housing bust is near."

The first part of Low's analysis is correct. There has been a surge in REO (lender Real Estate Owned) sales, and the banks have become much more aggressive on pricing, especially at the low end. The increase in REO sales probably more than accounts for the increase in activity in the PHSI.

But what does that mean for prices? The most recent data from Case-Shiller was for March (and Q1 2008 for the National Index). This surge in REO sales suggests that when the Case-Shiller prices are released for May and June, well, look out below for prices in these low end neighborhoods. That is what "aggressive" pricing means!

But what about the market "leveling out" or "stabilizing"? This depends on how you view sales. If we looked at existing home sales ex-REOs, we'd see that sales are still collapsing. And based on the recent MBA data, there is a flood of foreclosures coming. So maybe it will appear that sales are leveling out as the market is taken over by foreclosure sales, but that just puts more pressure on prices.

So the two key points from the Pending Home sales report are that prices are probably falling quickly, especially in the low end areas, and that sales are being propped up as REO sales start to dominate that existing home market. Neither point is good news for housing.