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: March Existing Home Sales
Back to a Tie Game between EHS & PHS: We essentially got exactly what we expected out of EHS in March as existing sales fully recoupled to Pending Sales (first chart below).
In a Nutshell:
- Inventory is still tight
- Sales growth is decelerating across all price tiers
- Growth in 1st time buyers sales is still slowing (albeit against a pretty hard March ’15 comp … trend probably improves modestly over next 3 months as comps ease)
- A solid sequential print only got you to +1.5% YoY with progressively harder comps from here
Existing Home Sales were up 5% sequentially in March after being down 7% in February, and decelerated to +1.5% YoY (roughly in-line with Feb's +2.2% YoY growth).
On the commentary side, Lawrence Yun, NAR’s chief economist, made the following points (emphasis added):
Buyer demand remains sturdy in most areas this spring and the mid-priced market is doing quite well. However, sales are softer both at the very low and very high ends of the market because of supply limitations and affordability pressures.
Additionally, a segment of would-be buyers at the upper end of the market appear to have been spooked by January's stock market correction.
With rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now. Unfortunately, the same underlying deterrents impacting their ability to buy haven't subsided so far in 2016. Affordability and the low availability of starter homes is still a major barrier for them in most markets.
Effectively what Yun's describing is a barbell issue, where the low end and high end are both slowing down - one out of necessity and the other out of fear. We've detailed both these issues at length in our Themes deck.
Supply Stagnation: On the inventory side, unit supply rose +6% sequentially to 1.98MM but remained -1.5% YoY (note: inventory is non-seasonally adjusted). The net of volume rising 1.5% and supply falling 1.5% drove inventory on a months-supply basis to 4.5-months, down from 4.6-months a year earlier, though up from 3.9mos, 4.0mos and 4.4mos in Dec, Jan, Feb, respectively. As a reminder, markets are generally regarded to be in balance (in balance means that HPI equates to zero in real terms) at a supply level of around 6 months.
Looking Ahead: As EHS are essentially just PHS on a 1-2mo lag, we’re more interested in the Pending Home Sales data (Mar release = next Wednesday, 4/27) as the cleaner, more real-time read on the underlying trend in purchase demand in the existing market. Historically, we've used MBA purchase application volume as the leading indicator, but for reasons not entirely clear, MBA's usefulness has declined as it has increasingly decoupled from the trends in PHS/EHS over the past year.
As it stands, PHS have largely decelerated for 10-months off the April 2015 RoC peak and we continue to expect sales in the existing market to decelerate throughout 1H16 with a strong possibility for negative volume growth against peak PHS comps in April/May.
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.
Joshua Steiner, CFA
Christian B. Drake