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.
Today's Focus: January Existing Home Sales, December Case-Shiller HPI
Existing Home Sales rose +0.4% MoM to 5.47MM Units, marking the 2nd highest level of activity in the current cycle outside of the 5.48MM level recorded in July of last year. On a year-over-year basis, sales growth accelerated to +11.0% YoY, marking the fastest pace of growth since mid-2013.
On the inventory side, unit supply rose +3.4% sequentially to 1.82MM but remained -2.2% YoY (recall, inventory is non-seasonally adjusted so the year-over-year trend offers the cleanest read). Months-supply, meanwhile, held just below 4.0-months for a second consecutive month – the first such instance since January 2005 when unit sales were running over 7-million.
Inventory tightness, along with the decline in mortgage rates, should remain a modest support to HPI over the nearer-term but will increasingly serve to constrain the upside in transaction volume. Indeed, at +8.2% YoY, median home prices accelerated to the fastest rate of growth in a year and continue to grow at a multiple of income growth.
Generally, supply and price could be expected to move in tandem but embedded in that relationship are a number of key assumptions. First is that people want to move. Boomers - who represent a significant percentage of the homeownership base - entering retirement will weigh on housing turnover broadly. Aging in place remains an emergent trend and moving-out will not become an outsized driver of supply for another decade when the Boomer bulge starts moving beyond 80 YOA. Second is whether they can afford to move. A significant percentage of would-be trade up buyers remain in negative or near-negative equity positions and fledgling millennial household formation is running almost exclusively through rental demand presently. Third, do they have access to credit? The credit box is slowly expanding but remains notably tight relative to historical averages. Fourth, low rates locked in during the post-crisis period remain a disincentive to selling/moving and an inertial headwind to rising inventory.
In short, there are real structural headwinds to a meaningful rise in supply and we don’t expect them to resolve in the nearer term. On the demand side, absent a large rise or positive revision in Pending Home Sales (Jan PHS on 2/29), the risk to EHS in February is to the downside as closed transaction volume recouples with the trend in signed contract activity. We continue to expect sales in the existing market to decelerate through 1H16 with a strong possibility for negative volume growth against peak PHS comps in April/May.
Still Bearish on HPI in 2016
Elsewhere, Case-Shiller HPI trends for December came in mixed. The 20-City index, which had shown 5 consecutive months of acceleration, was flat sequentially at +5.74% YoY as index heavyweights San Francisco, New York, Los Angeles and Boston (collectively = 48% weighting in the index) all decelerated modestly to close out 2015. Conversely, the National HPI accelerated for a 6th consecutive month, accelerating +20bps sequentially to +5.43% YoY.
Home price growth follows the slope of demand growth on a variable 9-to-12 month lag and Pending Home Sales are currently in month 7 of deceleration. While ongoing supply tightness will provide some buoy, we expect HPI trends to flat-line and begin to roll as we move through 1H16. As a reminder, the Case-Shiller HPI series is a 3-month rolling average which is released on a nearly two month lag. In other words, the data released this morning is really a reflection of market pricing conditions back in Aug/Sep/Oct of last year.
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.
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 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