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: July Pending Home Sales
Forecasting the sales growth vector in the existing market over the last 2.5 years has been trivial as mean reversion above average historical levels of activity and tight supply conditions predominated, conspiring to drive a predictable direction and magnitude of growth in existing market transaction volume.
While underlying demand fundamentals remained positive, the acute and secular nature of inventory dynamics left little room for outside forces to act on the trend. Unsurprisingly, the search for an external force sufficient to compel a phase transition in volume growth continued unabated in July … and should persist through year end, at least.
The implications of the July data are fairly straightforward and most of what matters is captured in the first 2 charts below, but a few highlights:
- Growth: PHS fell -0.7% sequentially and -2.3% Y/Y, marking a 7th consecutive month of negative growth and continuing the trend toward deceleration which began in earnest some 31 months ago beginning in Jan ’16.
- Comps: Comps get marginally easier the next two months before stepping up considerably over Oct-Dec. So while base effect dynamics may support some rate-of-change improvement the next two months, it will be mostly optics. And while supply has shown some encouraging, fledgling signs of inflection (see: EHS | Adios, Albatross) it’s of insufficient magnitude to resolve the extant upside constraint on volume growth.
- PHS vs EHS: The sequential decline in PHS suggests the balance of risk for EHS remains to the downside over the next month(s). Consensus has been looking for gains in EHS in recent months – an increasingly serial (mis)expectation that remains difficult to understand given the trend in signed contract activity was signaling the opposite and the consistent empirical proclivity for EHS (closed transaction volume) to re-converge with the trend in PHS (signed contract volume) following any short-term dislocation between the two series. Moreover, with Mortgage Purchase Application volume down -80bps sequentially in July and tracking down -7.2% sequentially in August, upside risk is increasingly diminishing.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
Frequency:
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
