Pending Home Sales: A Leading Read on Closings

Key Takeaways

• The pending home sales index tracks signed contracts on existing homes that have not yet closed.
• It leads existing home sales by a month or two, since contracts precede closings.
• The index is set so that 100 equals the average level of contract activity in 2001.
• A pending sale can still fall through, so the index slightly overstates eventual closings.

What It Is

The pending home sales index comes from the National Association of Realtors, a trade group. It is based on signed contracts for existing single-family homes, condos, and co-ops, drawn from data covering over 100 multiple listing services and 60 large brokers, a sample equal to about 20% of all transactions.

The index is scaled so that a reading of 100 equals the average level of contract activity in 2001, the first year analyzed. NAR chose 2001 because existing home sales that year fell in a 5.0 to 5.5 million range considered normal for the population. The report releases near the end of each month at 10:00 a.m. Eastern.

The Intuition

A home purchase moves through stages: offer, signed contract, financing, then closing. The pending home sales index captures the signed-contract stage, while existing home sales capture closing. Since contracts come first, pending sales preview closings by a month or two.

That lead time is the whole point. NAR demonstrated when building the index that the level of monthly contract activity parallels closed existing home sales in the following two months. So a jump in pending sales today often foreshadows a rise in existing home sales reported a month or two later. For anyone trying to read the housing cycle in real time, the pending index gives an earlier look than waiting for closings.

How It Works

The index converts raw contract counts into a comparable scale:

Pending Home Sales Index = contract activity relative to the 2001 average
100 = average monthly contract activity during 2001
Above 100 = more contract activity than the 2001 baseline
Below 100 = less contract activity than the 2001 baseline

The figure is seasonally adjusted and reported nationally and by census region. Because the underlying sample covers a large share of the resale market, the index is a robust gauge of buyer activity at the contract stage.

One structural caveat is fall-through. Not every signed contract becomes a closed sale. Financing can collapse, an inspection can kill a deal, or a buyer can walk. Cancellations mean the pending index tends to run slightly ahead of actual closings, so the lead relationship is reliable in direction but not a one-to-one count.

Worked Example

Suppose NAR reports a pending home sales index of 75, up 1.5% from the prior month. Place that in context:

Pending index:        75   (+1.5%)
2001 baseline:        100
Reading vs baseline:  25% below the 2001 normal pace

Two readings stand out. The monthly 1.5% gain shows contract activity firmed up, which hints existing home sales should tick higher in the next month or two. But the absolute level of 75 sits well below the 2001 baseline of 100, meaning contract activity remains far softer than the historical normal pace.

The honest read is improvement at the margin within a still-weak market. An investor would treat the rising contracts as an early hint of a modest pickup in closings, while remembering the overall level signals subdued demand.

Common Mistakes

1. Treating it as closed sales. The index counts contracts, not completed transactions. Some pending deals fall through before closing.

2. Ignoring the leading relationship. The index previews existing home sales by a month or two. Reading it as a snapshot of current sales misses its purpose.

3. Forgetting the 2001 baseline. A reading of 75 is not 75% of anything intuitive. It is 25% below the 2001 average contract pace.

4. Overreacting to one month. Rate moves, weather, and seasonality move single months. The trend over several months is the signal.

5. Confusing it with new home sales. The pending index covers existing homes only. New home sales are a separate Census Bureau series.

Frequently Asked Questions

What is the pending home sales index in simple terms? The pending home sales index tracks how many existing homes go under contract each month before the sale closes. Because contracts come first, it gives an early read on where home sales are heading.

How does the pending home sales index affect investment decisions? It leads existing home sales by a month or two, so it offers an early warning for mortgage lenders, brokers, and home improvement retailers. A sustained rise in contracts often precedes stronger closings and housing-linked revenue.

What is a real-world example of the pending home sales index in action? A reading of 75 that rises 1.5% shows contract activity firming, hinting at higher closings ahead, yet the level sits 25% below the 2001 baseline of 100. Demand is improving but still weak overall.

How can investors use the pending home sales index effectively? Use it as the leading signal that previews existing home sales, and watch its multimonth trend rather than one print. Compare the level against the 2001 baseline of 100 to gauge how strong activity really is.

How is the pending home sales index different from existing home sales? The pending index counts signed contracts before closing, while existing home sales count completed closings. The pending index leads existing home sales by a month or two.

Sources

1. National Association of Realtors. "Pending Home Sales." https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales
2. National Association of Realtors. "Methodology: Pending Home Sales." https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales/methodology
3. Federal Reserve Bank of St. Louis (FRED). "Pending Home Sales Index (PEHSI)." https://fred.stlouisfed.org/series/PEHSI
4. National Association of Realtors. "Existing-Home Sales." https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.