Decoding Wall St.: How a Pending Home Sale Moves a Market
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Only in the zany sphere of business news and investing does a story on pending home sales garner so many headlines. In a weird way, this silly index (built in an Excel spreadsheet by tabulating data on other topics) released by a company that has an interest in promoting the housing industry, the National Association of Realtors (sound smart: NAR), actually usurped some of the waves that Warren Buffett created with his investing druthers. Go figure. Investors that own stocks in the expectation they will go up in value (be smart: opposite of “short sellers”) rejoiced over the January pending home sales index for it supported the advancing opinion by Wall Street insiders that the beleaguered housing sector has turned the corner.
Inside the Head of an Investor: Pending Home Sales Index
Much like the circle of life, investors have a circle of thoughts when economic data is released:
• More homes queued up to be sold-->signals stronger confidence and finances by households opting to buy a home instead of renting-->more spending on things to outfit the home-->more spending on things spreads to retailers, restaurants, etc.-->banks receive lofty interest payments on mortgages that likely will be paid, and their earnings improve-->a happy economic cycle is created.
Oh yes, all of this could be deciphered from a single, silly set of numbers by a large institution that represents commission-based realtors. No matter if the index is reported with a month lag (see that the data was for January), investors tend to extrapolate what is happening in the here and now and then apply it to it continuing (good or bad) in the future.
Decoding Toolbox: What is this report, really.
• Signed contracts: A commitment today that could be broken in short order should the two people deciding to buy a home get cold feet or lose a job between contract signing and closing.
• Index hit a two-year high in January: Shows the extent of the deterioration in home sales since 2007. So, really, how good is this index at a two-year high if the numbers in the past to calculate the future are so low?
• Downward revisions to December data: Basically means that pending home sales in December were not as robust as previously reported. Investors ignored this nugget.
• Fun fact: Existing home sales are what are borne from pending home sales.
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