| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
 Call us at 866-232-9890  Send us an email |
|
Schwab Guide to Economic Indicators: Pending Home Sales Index (PHSI) by the Schwab Center for Financial Research November 30, 2007 What is it? It's a monthly measure of signed contracts for the sale of existing homes which is produced by the National Association of Realtors® (NAR). According to the NAR, "A sale is listed as pending when the contract has been signed and the transaction has not closed." Since existing-home sales are counted when the transaction is closed, the NAR developed the pending home sales index (PHSI) as a leading indicator of existing-home sales (EHS). What is its relative importance? Medium. The report is viewed along with a variety of other economic indicators to help gauge the direction and strength of the economy, and what the Federal Reserve might do next with short-term interest rates. Though this monthly indicator is not as comprehensive and meaningful as the quarterly gross domestic product report (GDP), its timeliness can be important. This can occur when economic growth is thought to be near a turning point—up or down—by providing a monthly heads-up while quarterly data is awaited. It should be noted that this is a relatively new index. While it uses 2001 as a base year, the index was first released in March 2005 (for January 2005). Analysts and investors are still in the process of gauging how accurate and reliable the PHSI is in predicting existing-home sales. What impact does it have on the market? A rising index depicts economic strength; a declining index reflects economic weakness.  The overall economic backdrop, and expectations of what is needed from monetary policy and where it's perceived to be headed play a major role with the direction of stock prices. If the trend in the index is rising in a way that hints existing-home home sales are on the verge of overheating, bond prices could fall (yields rise) on the outlook for greater overall economic demand, potentially higher inflation and an increased chance that the Fed will hike interest rates. Stock prices may also fall. Why? A rise in bond yields can eventually make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell a portion of your stock portfolio and put the proceeds into bonds. Even if corporate profit growth seems supported in this time of strong home sales, the market will likely see it as being short lived given expectations for impending rate hikes and eventually slower economic growth. There's a scenario where stock prices could experience a temporary lift if the economic backdrop is subdued. Suppose the index comes to life in a manner suggesting the overall economy could be on the verge of rebounding from a weak period. This can give a boost to stock prices even with an expected rise in bond yields. That's because the market's expectation of potentially higher profit growth from greater economic demand can initially be the more influential factor in favor of higher stock prices. That is, for a period of time, it can be the more-dominant driver of stock prices, overshadowing the negative impact of rising bond yields (as discussed above). While the renewed strength in home sales might suggest an eventual need for Fed rate hikes, it probably wouldn't be deemed immediate because of an otherwise weak economic backdrop. It would likely take some time for other economic reports to strengthen in order to validate the existence of an economic recovery. A weak index could lift bond prices (reduce yields) based on expectations of less inflation pressure. Suppose the economy is strong but monetary policy had recently become tight (restrictive). Stock prices could improve on hopes of a halt in the Fed's rate-hike campaign, along with the possibility of a future injection of economic stimulus if the next move by the Fed is a rate cut. A weak index and a weak economy probably wouldn't help stock prices. That's because the chance of recession and reduced corporate profits would likely be the dominant fears. How is it calculated? The PHSI is based on data collected from large brokers and the real estate industry's Multiple Listing Services (MLS), a computer system used to market homes. It includes signed real estate contracts for existing:
For more EHS sample information, see the "How is calculated?" section for the existing-home sales report. To create the index, the NAR took the average level of contract activity during 2001 and converted it to a value of 100. All subsequent PHSI monthly readings are relative to this base-year. In addition to the national figures, indexes are provided by geographic region on a seasonally and not-seasonally adjusted annual basis:
The NAR believes that a majority of pending sales become existing-home sales within a month or two. According to the NAR, "Since pending home sales measure actual existing-home sales, the PHSI provides an accurate and reliable indicator of future home sales activity. Our sample shows that over 80% of all pending home sales go to settlement within a two-month time period (and a significant share of the rest close in month three and month four)." However, the NAR explains,
The report is released in the first week of the month and can be found at the NAR's home page. From "Site by Topic," click on "Research" and then "Housing Statistics" to obtain the latest report. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. (2007-5771) Return to Top |
Schwab Guide to Economic Indicators
|
Facebook
LinkedIn
Twitter
Digg