As a data point to predict future market strength, pending home sales can be important, but how relevant are pending home sales to upcoming markets? Almost everyone would like to gaze into a crystal ball and learn whether to buy, sell, invest or rent in the pivotal spring market just ahead.

Pending home sales are based on contracts signed the month evaluated by the National Association of Realtors' Pending Home Sales Index (PHSI.) According to the NAR's just-released PHSI for November 2006, there were fewer contracts signed by buyers to purchase homes in November.

NAR economists interpreted the December reading of 107.0 as a relatively small contraction from October's reading of 107.5. To them, the reading signifies a stabilization of the market. But, why?

Pending home sales plunged 16 percent lower in July 2006 (coinciding with record high gasoline prices and higher mortgage interest rates not seen since 2001,) from July 2005, but the NAR says the decline from year-ago levels has been steadily narrowing since then.

David Lereah, NAR's chief economist, observes, "Because there is a stronger parallel between changes in the index from a year ago and the actual pace of home sales in coming months, the index is pointing toward fairly stable home sales in the near future. That is another indicator that home sales likely bottomed-out in September."

That means that pending home sales are best tracked as a trend. Says Walt Molony, spokesperson for the NAR, pending home sales are "guidance for near-term performance in the housing market."

A sale is listed as pending when the contract has been signed and the transaction has not closed; pending sales typically are finalized within one or two months of signing, says the NAR. An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined and the first of five consecutive record years for existing-home sales. That's because there is a closer relationship between annual changes in the index and actual market performance than with month-to-month comparisons.

Molony explains, "It's one of a number of indicators that, taken together, point to the direction of the market. Because it is a new series, it will take some time to refine the seasonal adjustment factors, and at this point the annual comparisons are more meaningful. As the series matures and the sample size expands, it will become a more significant indicator. It has the potential of being expanded on a metro basis and could ultimately replace existing-home sales in importance among government, financial and Wall Street analysts."

"Although some monthly declines are possible, when we look at the forecast for existing-home sales in 2007 on a quarterly basis, we see gradual improvement over the course of the year," adds Lereah. "That will support future price appreciation as inventories are drawn down."

How closely do pending and closed sales compare?

"In looking at annual changes in the index and annual changes in sales performance, the index is right on," says Molony.

See background here .

So do fewer pending sales in November mean a downturn in December? "Most November PHS (about 80 percent) will close in December, and in January," responds Molony. "The small monthly change in the index isn't accurate enough at this point to project an increase or decrease sales rate, but it does show activity at stable levels near term."