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Pending sales and closed sales — what’s the difference?

By: 20 May 2011 One Comment

Regular visitors to First Arkansas News know that we talk about real estate quite a bit on this site.

Just visit the real estate category sometime and you’ll find coverage that borders on excessive — mortgage news, housing market reports, views from economists, etc. are tossed in that category regularly. Why focus so much on real estate? Simply put, it’s a leading economic indicator. When people are buying or not buying homes, that tells us a lot about what’s going on in the overall economy. After all, people who don’t have jobs or are worried about losing the ones that do have generally don’t purchase large items such as houses.

It seems, however, that some people tend to use pending and closed sales almost interchangeably when discussing housing market conditions. A closed sale is a different breed of cat from a pending one, so knowing the difference between the two is critical to any discussion of market conditions.

Here at First Arkansas News, we report closed sales as that is a fairly common practice — when a news article references homes sales for April (for example), the metric at issue is typically closed sales. You can see an example of that metric at work in the housing market reports for central Arkansas and northwest Arkansas posted here this week.

The typical real estate transaction can often be broken down into two, distinct parts — pending sales and closed sales. As soon as all parties to the transaction enter into that contract, you’ve got a pending sale. If the pending sale is finalized, you’ve got a closed sale.

A pending sale is merely a promise to purchase a home and is usually contingent on a number of things. While buyers and sellers hope a pending sale will turn into a closed one, there more than a few factors that can prevent that from happening. If the buyer is unable to secure a mortgage, for example, the sale won’t close. Pending sales will tell us whether buyers are hitting the housing market in droves or not, but they don’t matter just a whole lot unless those sales close.

Here’s the point — it takes time, typically a month or more, for a pending sale to turn into a closed one. The aforementioned April sales reflect market conditions in March or, to an extent, February. It is not accurate to say that the number of homes sold in April is indicative of market conditions that were present during that month. The contracts that were entered into in April will mostly close in May and June and we’ll see then how conditions such as awful flooding, consumer confidence, etc. influenced buyers’ decisions to purchase homes.

The aforementioned April housing market reports, then, reflect the finalization of real estate transactions that were mostly started in March and, to a degree, February. That being the case, it’s clear that picking events that happened during April and using them to explain how they influenced closed sales in that month is inherently flawed.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.

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