EHS - RECOUPLING TO PHS

Takeaway: This morning's Existing Home Sales print looks disappointing at first take, but less so when you look at the EHS/PHS dynamic since March.

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 - RECOUPLING TO PHS - Compendium 12.22.14 

Today's Focus: November Existing Home Sales 

Existing Home Sales dropped -6.1% sequentially from 5.26MM in October to 4.93MM in November, the largest sequential decline since January and the first month below 5MM units SAAR since May.  

However, given the similar temporal dynamic last year, from a rate of change perspective, EHS grew +2.1% YoY, down from the +2.3% reported in October but just the second month of positive YoY growth in the last 13 months.  

A few things to consider:

Soft but Not Surprising:  In the October EHS review we highlighted the emergent divergence between Pending and Existing Home Sales.  Specifically, off the March trough, EHS were up +14.6% while PHS was up just 11.5%.  Further, PHS for October were down -1.1% sequentially, taking the total gain from trough down to +10.5%. 

Given that the two series are invariably tethered, unless we saw sequential strength and/or a significant positive revision to the PHS data, it was unlikely EHS would show similar strength in November. Inclusive of November, the gain since trough for EHS is now +7.4% (vs. +10.5% for PHS). Should PHS for November (released 12/31) come in flat to better sequentially, we'd expect rebound strength in EHS over the next couple months. 

GSE Regulatory Changes:  As we highlighted alongside last week's Purchase application data, the regulatory change for Fannie Mae which reduces the minimum down payment requirement to 3% from 5% took effect on December 13th.   To the extent the change weighed on November or early December demand remains to be seen. We suspect the impact was probably modest - and seasonal distortions in the peri-holiday period will complicate delineating any specific factor in broader demand trends - but we'll get a look at the first week of potential impact in Wednesday's MBA release.   

Seasonality:  The seasonal factor for EHS in the fourth quarter has been getting progressively smaller (ie. getting closer to 1.0) since 2006 which is to say that organic trends, and not seasonal adjustments, have become an increasingly predominate driver of the reported sales figures.  

The October and November seasonal factors (defined here as NSA/SA) have been notable.  The October seasonal factor was well above the trailing 5Y average and above 1.0 for the first time since 2008.  Had the scalar been in-line with the average, seasonally-adjusted EHS in October would have been +5.43MM (vs. 5.26MM reported).  

Conversely, the seasonal factor for November (0.857) was well below the trailing average (0.905), helping support what would have been an even worse sequential decline.  

Normalizing the last two months of data yields a two month average of ~5.05MM, which compares to the TTM average of  4.88MM.   So ongoing, albeit modest, improvement remains the broader trend.  

EHS - RECOUPLING TO PHS - EHS vs PHS Gain since trough 2

EHS - RECOUPLING TO PHS - EHS LT 

EHS - RECOUPLING TO PHS - EHS Seasonality

EHS - RECOUPLING TO PHS - EHS Inventory Units

EHS - RECOUPLING TO PHS - EHS Inventory Mo Supply

EHS - RECOUPLING TO PHS - EHS Regional

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.

Joshua Steiner, CFA

Christian B. Drake