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.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table above represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: July Pending Home Sales Index
The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of July.
THE DATA: PHS increased +3.3% MoM vs a downwardly revised June print, taking the index level to 105.9 - its best level since July of last year. On a YoY basis, growth remained negative for a 10th consecutive month although the rate of change improved to -2.1% YoY from -7.5% prior.
KNOWN UNKNOWNS: We’ve commented on the burgeoning divergence between the MBA Purchase App series and the PHS data the last few months. While the MBA data suggests an almost unprecedented collapse in purchase demand, the PHS data suggests more modest softness.
A share shift in the origination channel due to QM implementation is a known although there’s a dearth in hard, real-time quant around the magnitude of the shift (newsflow on the topic has been accelerating of late: WSJ: Nonbank Mortgage Lenders Bounce Bank, WSJ: Mortgage Market Tightness is Standard Issue, FT: WFC Chief Warns on Mortgage Lending).
The known unknown is the magnitude of impact the shift may be having on the intertemporal reliability of the MBA survey if, in fact, QM rules have shifted some purchase market share away from the originators that are surveyed by the MBA.
In short, the principal demand series continue to offer conflicting signals and while the PHS data have come in better than feared, the broader reality of ongoing softness in housing demand remains.
BOTTOM LINE: Demand comps get progressively easier from here through 1Q15 while HPI comps get progressively harder. It remains our contention that 2nd derivative trends in HPI are the predominate driver of prices in the housing complex and with inventory rising, demand middling, and comps steepening, we expect housing related equities to track sideways to down alongside ongoing deceleration in home price growth.
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.
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