How Homebuyers Should Use The Pending Home Sales Index To Their Advantage

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Homebuyers are back.

According to data culled from the Multiple Listing Services, the number of homes under contract increased for the second straight month in March -- additional evidence that the housing market is getting back to Business Time.

Properties in this in-between stage of the homebuying process are known as "pending" and because 80 percent of homes under contract "close" within 60 days, the Pending Home Sales Index can be a semi-reliable predictor of future real estate activity.

We say "semi-reliable" because the Pending Home Sales Index is somewhat imperfect:

1. It doesn't measure new construction sales
2. It doesn't track For Sale By Owner homes or auctions
3. Its sample set is just 20 percent of all MLS transaction

Furthermore, today's mortgage climate can be tough.  Some percentage of pending home sales will ultimately fail to close because financing is unavailable.

All of that aside, the Pending Home Sales Index offers a terrific look at buy-side demand for housing, a primary driver of home values.  Nationally, the index is up 3 percent from March and across the Midwest -- home to Ohio, Illinois and Wisconsin among others -- pending home sales are up 8 percent annually.

More demand leads home prices higher.

When pending sales rise, it's a bona fide signal of housing market strength; we can infer from it that the number of active homebuyers are growing.  And, why wouldn't they be?  Homes are relatively cheap for people right now, mortgage rates are making them cheaper, and the government is throwing giving up to $8,000 in incentives to people that qualify. 

It's no wonder that half of March's homebuyers were first-timers.

Now, it's worth repeating -- just because the Pending Home Sales Index is on its second straight uptick doesn't mean that all these homes will necessarily close.  It does tell us, however, that more buyers are finding "now" to be a good time to re-enter the market.  It's this sort of insight that makes the Pending Home Sales Index worth tracking because the index points to higher home prices in the months ahead.

When buyer demand rises, the real estate market as a whole is rarely far behind.