This week, the National Association of Realtors (NAR) announced that there have been errors in the assumptions they used to calculate sales of existing homes. Going back as far as 2007, they will be recalculating and revising existing home sales figures - downward. Which means: the housing bust was even worse than we’d thought.
NAR says it will release the new figures next week
In a video released by NAR, their Chief Economist Lawrence Yun describes how these errors occurred, and how the sales figures will be revised using a process called “rebenchmarking.”
NAR’s method for calculating home sales is based upon the “decennial census.” The last decennial census for which the data have been released was in 2000. That year, 5.2 million existing homes were sold. NAR’s methodology is to use that year as a “benchmark,” since that is a year that there actually are home sales figures for.
NAR then reviews MLS data for that year. Unlike the decennial census data, MLS data are available every year. NAR uses the MLS data to calculate changes to the benchmark. For example, if home sales reported on MLS increase by 8% from 2000 to 2001, NAR can use that “benchmark” of 5.2 million sales, and assume that it also increased by 8% in 2001 - and so calculate a figure of 5.6 million homes sold for 2001.
That works fine assuming nothing else changes. However, over the years, if other factors do change, then this method of calculating may no longer be accurate. The calculated number of home sales “drifts” from what the true number of home sales is. Then NAR researchers must find a new benchmark - a new “real” home sales number to use in order to make their calculations. This process is called “rebenchmarking.”
The main reason that NAR’s calculations have drifted is that the MLS service was never designed to be a research tool. It was intended to be a sales tool. Some problems with trying to use MLS data for research are:
- Some homes move as “For Sale by Owner” - outside of the MLS system. As long as the percentage of by-owner sales remains the same, it won’t affect the calculation. But in a challenging real estate market, more homeowners use realtors, rather than trying to sell their homes themselves. So more home sales will appear on MLS - but this does not mean that the total number of home sales went up.
- Also, in a depressed housing market, home-builders are more likely to attempt to sell new homes via MLS. As Yun notes, the sales figures that NAR receives from MLS do not always distinguish between new and existing homes. So these new home sales also may make it appear that MLS existing homes sales have risen.
- A third problem with using MLS figures for research is that sometimes homes will be listed more than once - perhaps in two different geographical markets, or perhaps listing a home in two different ways (e.g. as a 3 bedroom; as well as 2 bedroom plus study) in order to attract more interest. This is permitted on MLS, as the service is a sales tool. But, when that home sells, it means that the sale may be reported twice.
These are three of the reasons that NAR’s calculated home sales figures have drifted upwards over the past years. The last time they had a “benchmark” figure, of real home sales, was eleven years ago, in 2000. The challenging real estate market over recent years means that some of their assumptions on how they could use MLS data to calculate home sales do not work: the figures that they calculated were too high.
Unfortunately, the 2010 census did not include a long-form census. This means that NAR cannot use the 2010 census data for their rebenchmarking. However, they will be using information gathered in the American Community Survey, a survey sent to 1.3 American households every year, for their rebenchmarking process.
The revised NAR calculations of existing home sales will be released on December 21st.
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