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.
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.
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.
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.
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