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We will be hosting Q4 Housing Themes Presentation on Wednesday, October 4th at 11:00AM ET.
Full details will be released closer to the call.
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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: August Existing Home Sales
When last we checked in (Yesterday and Monday) the weather was busy simultaneously increasing Housing Starts and cratering Builder Confidence (around those same housing starts/sales), confounding every analysts favorite spurious activity …. generating convicted point estimates forecasts around the inherently unknowable impact of multiple hurricanes on high frequency macro data.
Today's iteration of errant Hurricane Impact Handicapping comes compliments of EHS which fell -1.7% M/M in August while decelerating to +0.2% Y/Y.
Consensus was looking for a sequential increase which is difficult to understand on a number of fronts:
- PHS is a naturally strong lead indicator for PHS and the empirical propensity the last few years has been for EHS to recouple with PHS following short periods of dislocation. With PHS down modestly in July, the baseline expectation would be for a flat to down EHS print for August
- Harvey: The Houston Association of Realtors had already reported that home sales in Houston were down -24.2% Y/Y in August. Houston area sales have accounted for roughly 1.8% of total existing sales on an NSA basis over the last two quarters so the August decline for Houston alone would be a >-40bps headwind to growth.
- Continued Tight Inventory - which we’ve detailed repeatedly (Here, for example) – has remained the principal upside constraint on volume, restraining demand growth to the low single digits for most of the last 2 years. Even with underlying demand fundamentals remaining strong, it’s difficult to expect any near-term volume upside with limited activity in two major markets and where conditions are only serving to further exacerbate acute supply concerns.
The weather related decline in closed transaction volume in Texas will largely be time shifted, but we’re likely to see a similar magnitude of impact in signed contract activity in the PHS data next Wednesday … which will then have negative carry through to EHS in September. The distortion will be further extended (& amplified) by the effects of Irma which will roll through the data in Sept/October and effectively carry us through the balance of the year from a reporting perspective.
In short, we expect the data characterization in Sept-Oct to be similar in flavor to August and broadly reflect a continuation of the same market dynamics that have characterized the last 18-months.
Specifically, demand growth in the existing market is likely to remain in the low single digits. Supply tightness will continue to limit the upside in volume growth but will also support further HPI increase which, in addition to being a tailwind to housing related equites, should feedback positively to supply. NHS growth, meanwhile, will continue to run at a healthy spread to that in the existing market with trade-up activity serving as a modest, marginal source of low/middle-tier inventory.
And lastly, a quick redux on our baseline expectation for the progression of supply-demand-price dynamics as we plod the path towards housing market normalization:
Tight supply and strong demand continue to drive prices higher → Accelerating HPI, historically, is good for housing related equities. Granted, prices are growing at a premium to income growth which is obviously unsustainable but also does not represent an acute short-term volume concern when affordability remains favorable in the aggregate, which it is currently → Rising prices, meanwhile, drive improved equity positions and will, gradually, help the still significant stock of negative and under-equitized homes transition back into the candidate supply pool → this, in turn, will help progressively relieve the inventory bottleneck → declining affordability and rising supply (or some combination of both) will act as an intrinsic governor on price growth … the flavor of that feedback mechanism won’t be insignificant as they carry largely antithetical implications for the volume outlook.
The Data:
- Sales: August's Existing Home Sales of 5.35 million (SAAR) decreased -1.7% sequentially from July and increased +0.2% Y/Y - and is the lowest overall number since last August.
- 1st Time Buyers: first-time buyers represented 31% of sales in August, down ~200bps M/M and the lowest share since last August. NAR commentary again centered around concerns about the affordability of homes for new buyers spotlighted the trends in both pricing and the velocity of home sales. Affordability for new home buyers will be worth watching for in the South in the coming months as any rebound demand emerges in an increasingly tight market.
- Regionally: The Northeast corridor posted a +1.41% increase in sales, leading the pack by a fair bit. The other growers were West and the Midwest regions, with +0.84% and +0.79% growth respectively. The South trailed the group with a decrease of -0.98% for the month.
- Inventory: Total inventory took another step down, -declining 2.1% to 1.88mn existing homes for sale while holding negative for a 27th consecutive month at -6.5% Y/Y.
- Months Supply: With the decline in unit inventory outpacing the drop in sales, months-supply fell to 4.22 months - down from 4.5 months a year ago and down -0.4% sequentially.
- Home Prices: The median existing-home price for all housing types increase +5.6% Y/Y, the 66th straight month of Y/Y gains. Regionally, the West once again saw the largest surge in median price at +7.7% Y/Y, with the South increasing +5.4%Y/Y, the Midwest increasing +5.0% Y/Y and the Northeast growing at +5.6% Y/Y.
MBA Mortgage Applications:
Seasonally adjusted purchase applications decreased -11% W/W, but maintained +1.9% growth Y/Y (lowest Y/Y growth since April), having been impeded by the 11bps surge in Treasury Yields, the impacts of Hurricanes Harvey and Irma, and any potential sluggishness stemming from the Labor Day holiday. Refinancing decreased by -9% from the previous week, while the refinance share of mortgage activity increased 110 bps to 52.1% of total applications from 51.0% the previous week.
Net of Florida and Texas, the rest of the US saw a +13% unadjusted increase in applications. Florida beared the brunt of Irma, issuing a -22% decrease in overall mortgage application activity, but Texas rebounded off of Harvey with a +27% increase in applications W/W.
