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EHS | Convergence to Zero Complete

Takeaway: EHS declined -1.6% YoY, marking the slowest pace of growth in 23-mos and completing the convergence to 0% growth. Focus now = PHS next Wedn.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

EHS | Convergence to Zero Complete - Compendium 082416

 

The data ping pong in domestic housing remains in full effect as yesterday’s shot of New Home Sales exuberance was chased with disappointing EHS and HPI data this morning.  

 

The Data:  Existing Home Sales dropped -3.2% sequentially and fell to -1.6% YoY, marking the slowest pace of growth since November of last year. Arguably, it’s the slowest pace of growth in 23 months given that November 2015 was negatively distorted by the TRID regulatory implementation in the prior month (the distortion in demand at the point of mortgage application flows through to actual closing volumes on a 4-6 wk lag).

 

The Convergence to 0% Growth: As we’ve highlighted, our expectation since the beginning of the year was for demand growth in the existing market to continue to converge towards 0% against peak comps.  With Pending Home Sales printing negative YoY growth for the 1st time in 2-years on a seasonally-adjusted basis in May, NSA growth printing a 19-month low in June, and EHS now confirming with negative growth in July, that expectation has largely been realized.   For the balance of the year, we think demand runs somewhere in the 0-3% range. 

 

The softness in EHS in July was not unexpected as signed contract activity (i.e. Pending Sales) naturally leads closed transaction volume (Existing Sales) and a recoupling of EHS to the relatively softer trend in PHS suggested sequential softness in existing sales for July.  We’re more interested in the Pending Home Sales data for July released next Wednesday (8/31). 

 

Looking across the rest of the release:

 

1st-time Buyers: The share of 1st time buyers (again) failed to maintain its emergent momo, retreating to 32% in July from the cycle peak of 33% recorded last month.   Growth in sales to 1st timers remained strong, however, growing +12.4% YoY.  The other side of that solid growth is a notable decline in demand from non 1st-time buyers.  Implied growth in EHS to non-1st timer’s fell -7.1% YoY, marking the fastest pace of decline in 5 years.  While much of the industry and investment focus has been on the prospects for re-emergent 1st timer demand to catalyze a next leg  higher in transaction volumes in the existing market, the realization of that prospect is predicated on largely steady demand from the non-1st timer contingent. 

 

Sales by Price Tier:  All price tiers declined to negative YoY growth in July but the weakness was barbelled as the low and highest price tiers led the weakness.  Sales growth fell to -10.6% and -10.4% in the <$250K and >$1M price tiers, respectively.

 

Regional:  Sales declined sequentially across all regions except the West (+2.5% MoM) and were flat-to-negative across all geographies on a YoY basis.   

 

Inventory Unit supply rose +0.95% sequentially but held negative (-5.8%) on a year-over-year basis for the 14th consecutive month.  With Sales down and Inventory up, months-supply rose to 4.74-months - marking the 47th month below the conventional balanced market level of 6-months. Tight Supply will remain a secular challenge as demographics, near-negative equity positons and the post-crisis foreclosure-to-rental conversion glut will continue to constrain inventory brought to market. 

 

HPI & Home Price Spreads:  Median Existing Home prices rose +5.4% YoY to 246K in July, bringing the New-to-Existing Price Spread to at 3-year low at $48.6K.  The price spread between new and existing homes has begun to compress in recent months as growth in new home inventory has improving relative to existing supply and builders have progressively focused more on entry level construction.  Continued spread compression would serve as a relative tailwind to demand in the new home market, at the margin.    

 

And Lastly ….

 

FHFA HPI = Deceleration: The FHFA HPI series for June released this morning showed price growth decelerating for a 3rd consecutive month, taking the rate of change in HPI to an 10-month low of +5.6% YoY.  With the Case-Shiller and CoreLogic series reflecting a similar trend, all three primary price series are telling a congruous story of HPI deceleration.   

 

EHS | Convergence to Zero Complete - SF EHS LT Cycle Context

 

EHS | Convergence to Zero Complete - EHS by Price Tier YoY

 

EHS | Convergence to Zero Complete - EHS vs PHS

 

EHS | Convergence to Zero Complete - EHS 1st time buyers

 

EHS | Convergence to Zero Complete - NHS vs EHS Price Spread

 

EHS | Convergence to Zero Complete - EHS Inventory Months Supply

 

EHS | Convergence to Zero Complete - EHS Inventory Units

 

EHS | Convergence to Zero Complete - EHS Inventory Units YoY

 

EHS | Convergence to Zero Complete - EHS Units   YoY TTM

 

EHS | Convergence to Zero Complete - EHS regional YoY

 

EHS | Convergence to Zero Complete - FHFA HPI YoY TTM

 

EHS | Convergence to Zero Complete - HPI FHFA   CS

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

 

About FHFA:

The Federal Housing Finance Agency (FHFA) Home Price Index measures changes in the value of single-family homes by analyzing Fannie Mae and Freddie Mac’s data on conforming, conventional mortgages. The index employs data from all US states, weights price trends equally for all properties, and is calculated using purchase prices as well as refinance appraisals. Similarly to the Case-Shiller, the FHFA HPI is published on a two month lag. However, the index represents only one month of data, versus Case-Shiller’s three month rolling average. Additionally, the FHFA HPI uses both purchase prices and refi appraisals in its calculations.

 

Frequency:

The FHFA HPI is published on the third or fourth Tuesday of every month. The index is released on a one month lag.

 

  

Joshua Steiner, CFA

 

Christian B. Drake


NHS | New High Gained, Asymmetry Lost

Takeaway: NHS marked a new cycle high in July. The mean reversion upside in both the New and Existing Markets is now rearview.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

NHS | New High Gained, Asymmetry Lost  - Compendium 082316

 

Today’s Focus: New Home Sales for July 

New Home Sales rose +12.4% MoM in July to +654K, marking the fastest pace of sequential growth in over two years and a new cycle high in total sales.  On a year-over-year basis, NHS growth accelerated to a 42-month high at +31.3% YoY.

 

Some notable context:  

 

Comps:  2Q/3Q comp dynamics are favorable so the reported strength in year-over-year growth in New Home Sales hasn’t been particularly surprising.  The same favorable dynamics characterize the next few months as well so reported RoC should remain reasonably solid.

 

Support Trifecta: In addition to the broadly conducive low-rate environment a couple primary factors have supported relative activity in the New Home market. Until July, New Home Sales activity still carried some mean reversion asymmetry with double-digit upside to the longer-run average and asymmetric upside to average peak levels of activity.  This setup stood in contrast to that in the existing market where activity has already full mean reverted.  Additionally,  the price spread between new and existing homes has begun to compress in recent months as growth in new home inventory has been improving roughly in line with sales and builders have progressively focused more on entry level supply.  We’ll get the EHS sales & price data tomorrow but it should reflect further compression in the median price spread.

 

Asymmetry Lost:  The negative rejoinder to the point above is that July gain brings NHS back to its LT historical average and collapses the former asymmetry (see 1st chart below).  Housing cycles do tend to be long and autocorrelated – playing out fully in both directions – but the easy, mean reversion upside is now rearview.  The existing-to-new home sales ratio also breached its long-term average to the downside for the first time in the expansion in July as relative strength in the new market over the last  couple quarters has driven a rising share of total transaction volume (2nd chart below).

 

KISS Principles & Low Vol Narratives:  As we highlighted last month, the simple reality is that, absent a regulatory or geopolitical shock or other outsized externality, labor will remain the primary demand lynchpin and so long as the employment recovery remains intact, we’re likely to see further trudging improvement in new construction sales & starts.  Of course, at the all-time high in equities and with VIX back to sub-12 and complacency in crescendo the ‘long-term recovery/upside’ narrative is always easier to pitch.  

 

NHS | New High Gained, Asymmetry Lost  - NHS LT cycle context

 

NHS | New High Gained, Asymmetry Lost  - NHS to EHS price spread

 

NHS | New High Gained, Asymmetry Lost  - NHS Units   YoY TTM

 

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NHS | New High Gained, Asymmetry Lost  - NHS by Region

 

NHS | New High Gained, Asymmetry Lost  - NHS by Price Tier

 

NHS | New High Gained, Asymmetry Lost  - NHS Mean   Median Price

 

NHS | New High Gained, Asymmetry Lost  - NHS Inventory

 

 

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


CASE-SHILLER | HPI - THE GREAT MODERATION

Takeaway: CS HPI registers a 3rd month of deceleration, while support continues to come primarily from the low end.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

CASE-SHILLER | HPI - THE GREAT MODERATION - Compendium 062816
 

Today’s Focus: April Case-Shiller HPI 

 

The Data:  Case-Shiller HPI data for April released this morning – which represents average price data over the February-April period – extended the trend of flat-to-slowing price growth as the 20-City series was largely flat sequentially while the National series decelerated for a 3rd consecutive month, slowing -10bps sequentially to +5.0% YoY.  The negative 2nd derivative trend in the Nation Series – where growth is now -30bps of the Jan ’16 peak rate-of-change – accords with the FHFA HPI series for April released last week which showed price growth decelerating -30bps sequentially to +5.9% YoY.

 

Low End Support: Notably,  the Case Shiller Price tier data show that the low end – while slowing modestly the last few months – continues to buttress price growth in the composite.  Price growth across both the Mid and High Tiers began to slow ~3Q15 as the pace of inventory decline bottomed (see charts 5/6 below).  From here, it will be interesting to observe price action at the entry level as growth in 1st time buyer demand continues to slow at the margin.  According to the latest NAR data, transaction volume growth for first-time buyers was actually negative (-2% YoY) in May.  

 

HPI Tug-O-War | Advantage Demand: As we profiled in our 2Q Themes presentation and illustrate in charts 3 & 4 below, price remains in an interesting spot with the supply environment arguing for moderate price acceleration while lagged demand trends imply moderate deceleration.  Over the TTM those countervailing forces have largely produced a stalemate with demand trends culling a slight advantage.  With price performance across housing equities strongly correlated to 2nd derivative price trends historically, current HPI trends sit as a modest drag for the complex.  

 

 

CASE-SHILLER | HPI - THE GREAT MODERATION - CS National vs 20City

 

CASE-SHILLER | HPI - THE GREAT MODERATION - FHFA   CS YoY TTM

 

CASE-SHILLER | HPI - THE GREAT MODERATION - Demand vs Price

 

CASE-SHILLER | HPI - THE GREAT MODERATION - Supply vs Price

 

CASE-SHILLER | HPI - THE GREAT MODERATION - CS HPI by Price Tier

 

CASE-SHILLER | HPI - THE GREAT MODERATION - Inventory by Price Tier YoY Chg

 

CASE-SHILLER | HPI - THE GREAT MODERATION - EHS 1st Time Buyers

 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


HOUSING: PHS | Rebasing or Rogue?

Takeaway: After a string of 0-2% Y/Y growth prints, PHS showed a pulse in April, fueled by strong growth in the Northeast.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

HOUSING: PHS | Rebasing or Rogue? - Compendium 052616 



Today’s Focus: April Pending Home Sales 

Pending Home Sales posted its largest sequential increase in 5 ½ years in April, taking the Index to a new 10Y high.  On a seasonally adjusted basis, year-over-year growth accelerated to +4.6% YoY from ~+0% over the last 3 months.  In contrast, year-over-year growth on a NSA basis decelerated for a 2nd consecutive month to +2.9% YoY.  Regionally, the +6.8% rise in the South and the +10.1% increase in the West drove the sequential strength while the 10.1% YoY gain in the Northeast supported the YoY acceleration.   

 

Frankly, we were surprised by the magnitude of strength in the April data as we were looking for something in the -2% to +2% range.  The key question out of the print is whether we have, in fact, rebased to a higher level of activity or whether April represents an outlier.  The preponderance of domestic macro, where stall speed remains the predominant trend, suggests the latter while the similarly strong (albeit distorted) NHS report on Tuesday hints at the former.    For sure, rates remain low, labor trends decent and the longer-term opportunity for housing compelling but that’s been broadly true for most of the last four years and why that confluence of factors would suddenly manifest in multi-year/multi-decade high growth rates precisely in April isn’t obvious. 

 

A few other quick considerations:

  • Mean Reversion:  Mean reversion in Pending Sales has already occurred and at 116 on the index we are now +13.5% above the long-term average with further upside seemingly constrained.  The primary caveat is that the “long-term” only extends back to 2000 and the advent of the PHS series (see 1st chart below).  The 2nd chart below – which shows single family existing home sales adjusted for population growth -  offers some longer cycle context.  With sales at 4.78MM units as of the latest month we sit +3.3% above the long-term average with 24% upside to average peak levels and -34% downside to average cycle trough levels.  Note that sales are population adjusted and the average peak calculation excludes the bubble peak in 2005/06. 
  • Good = Bad:  To the extent strong Housing data drives policy action out of the Fed the feedback loop is a negative one as housing related equities are marked underperformers during tightening cycles.  
  • EHS:  The gain in PHS in April augurs sequential strength for EHS in May.  A full recoupling between the two series implies +5.1% upside in EHS to 5.71 MM units.   We'll get May EHS on 6/22.

 

HOUSING: PHS | Rebasing or Rogue? - PHS LT

 

HOUSING: PHS | Rebasing or Rogue? - EHS SF LT Pop Adjusted

 

HOUSING: PHS | Rebasing or Rogue? - EHS vs PHS

 

HOUSING: PHS | Rebasing or Rogue? - PHS YoY NSA   SA

 

HOUSING: PHS | Rebasing or Rogue? - PHS Index   YoY TTM

 

HOUSING: PHS | Rebasing or Rogue? - PHS Regional YoY

 

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


PHS | What's the Catalyst?

Takeaway: Mild weather helped juice the March PHS print, but even so total contracts signed for existing homes only rose 1% Y/Y.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

 

PHS | What's the Catalyst? - Compendium 042716

 


Today’s Focus: March Pending Home Sales 

Pending Home Sales in March rose +1.4% sequentially and accelerated +70bps sequentially to +1.4% year-over-year.  Much of the strength was driven by the strong +18.4% comp out of the Northeast, which likely has weather written all over it.

 

That +1% YoY growth could be considered “a beat” speaks well to the prevailing environment.

 

If there was an official Hedgeye Housing Manifesto, the primary prescriptive notion would be that everything that matters happens on the margin.  That is, the forecasting goal centers on divining better/worse not good/bad and front-running those inflections. 

 

The current challenge – with HMI, NHS, Starts, & PHS all flat for the last year - is that nothing is really happening at the margin and a crawling 2nd derivative convergence to zero isn’t alpha’s playground. 

 

To frame-up and put some quick context around the nearer-term setup:  Demand comps in the existing market get harder the next few months and, at current levels of activity, transaction volumes would be down ~-1% in Apr/May.  If continued sequential improvement were to persist, demand growth would run 0% to +2% YoY over the next quarter+. 

 

So, -2%-to-+2% is your fundamental demand backdrop through the balance of 1H16.   Note, also, that (unlike NHS/Starts) existing sales have already fully mean-reverted back above average historical levels of activity so the easy asymmetry/upside has already been captured. 

 

Summarily, with demand stagnating, price growth beginning to roll, supply constraints persisting, the preponderance of domestic macro data decelerating and no discrete, large-scale catalysts we're not seeing much for housing bulls to hang their hat on here presently. 

 

 

 

 PHS | What's the Catalyst? - PHS Units   YoY

 

PHS | What's the Catalyst? - PHS Regional YoY

 

PHS | What's the Catalyst? - PHS LT

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


New Home Sales | Stagnation

Takeaway: March New Home Sales figures fall sequentially and continue the sideways trend of no growth broadly present across the US Housing complex.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

New Home Sales | Stagnation - Compendium 042616
 

Today’s Focus: New Home Sales for March

New week, same data trend as 'the nothing' continues to propagate across domestic housing activity.  New Home Sales declined -1.5% sequentially and were (only) up +5.4% YoY against easy March comps.  Similar to Starts & Builder Confidence, New Home Sales volumes over the TTM have completely flatlined (1st chart below).

  • Inventory:  continues to rise with For Sale Inventory up +3% MoM and +19.8% YoY; 242K Units in march = highest since October 2009.
  • Sales By Price Tier:  While the slowdown in the lower end (Sub-300K) has moderated the trend toward deceleration continues to characterize the middle and higher-end.  

In short, New Home Sales closed 1Q on a stagnation-ary note and continue the sideways trend of no growth broadly present across the US Housing complex.

 

 

 New Home Sales | Stagnation - NHS Units   YoY TTM

 

New Home Sales | Stagnation - NHS By Price Tier YoY

 

New Home Sales | Stagnation - NHS Inventory

 

New Home Sales | Stagnation - NHS Mean   Median Price

 

New Home Sales | Stagnation - NHS vs EHS Price Spread

 

New Home Sales | Stagnation - EHS to NHS Ratio

 

New Home Sales | Stagnation - NHS LT

 

 

 

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

   

 

Joshua Steiner, CFA

 

Christian B. Drake

 


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