Pending home sales  is an index that measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years.

Contract activity for pending home sales has risen for six straight months, a pattern not seen in the history of the index since it began in 2001

The historic trends are due to record highs in housing affordability. Combine that with the first time homebuyer tax credit of $8,000 and now is a really good time to buy. The tax credit is set to end at the end of November, but there are bills on the table to extend the program and add additional money. Out of the 2 million home sales since the start of the tax credit, over 350,000 home sales have occurred that otherwise would not have happened without the tax credit.

Nationally, the typical mortgage payment now takes less than 25 percent of a middle-income family’s monthly income to buy a median priced home, with payment percentages so far in 2009 being the lowest on record dating back to 1970.

What is the Pending Home Sales Index?

The index was start in 2001 in an effort to forecast the real estate market.

The Housing Affordability Index is a relative index where a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced existing single-family home, taking into account the relationship between median home price, average effective interest rate for loans closed on existing homes, and median family income.  The higher the index, the better housing affordability is for buyers.

The calculation assumes a downpayment of 20 percent and a qualifying ratio of 25 percent of gross income for mortgage principle and interest payments.  The index is a general gauge with conditions varying widely around the country.  Affordability conditions are lower for first-time buyers with smaller downpayments and less income.

An index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed. Coincidentally, 2001 was the first of four consecutive record years for existing-home sales. 2001 sales are fairly close to the higher level of home sales expected in the coming decade relative to the norms experienced in the mid-1990s. As such, an index of 100 coincides with a historically high level of home sales activity.

References:

Pending Home Sales Index

Pending home sales on record roll