Conclusion: U.S. Existing Home Sales came in at well below consensus and inventory is at close to all time highs, which is just another supporting data point towards Hedgeye reducing its already Street low GDP growth estimate for 2011E of 1.7%.
Our Financials Sector will be up with their usual detailed post on the recently released U.S. Existing Home Sales, but in advance we wanted to give a quick overview. The number for July came in at 3.83 million on an annualized basis, which is a 27.2% decline from June.
Not surprisingly, this was well below the median forecast of 4.65 million. In fact, the low end of consensus was 3.96 million on an annualized basis. So the reported number was 17.4% below the median consensus, and 3.4% below the lowest end of the estimates. (It kind of makes you wonder about the math of the Perceived Wall Street Gurus, doesn’t it?)
In aggregate, the number of previously owned homes on the market rose 2.5% to 3.98 million. Based on the current average sales price, it would take 12.5 months to sell the homes on the market. In aggregate, there are 11.9 months of inventory of previously owned sales on the market which is the highest level since 1983.
Interestingly, interest rates domestically were at relatively high levels in 1983. In fact, the Fed Funds rate in 1983 was between 9 ½ and 9 5/8, versus 0 – 0.25% now. This is an important point, which we have emphasized repeatedly; this build up in inventory is occurring at a time when affordability from an in interest rate perspective is at all time lows. Thus, which is obvious, there is no interest rate lever that can be pulled to reduce housing inventory as was available from 1983 onwards.
The key take away from inventory on the market is that housing prices need to go lower to catalyze more buying. Based on our models the downside in housing prices from here could be anywhere from ~10 – 50%. The data points today only solidify our case. Even more encouraging for our case is that our estimates for prices are quite divergent from consensus estimates, which are outlined in the chart directly below.
Since consumer spending makes up 70% of the U.S. economy, the value of the consumer’s key asset, their house, has a direct impact on their confidence in spending. As house prices go lower, so too does consumer discretionary spending. Thus as we get more certainty that home prices nationally will go lower, we also get more certainty that GDP growth is going to be less than expected in 2011E.
We are currently at 1.7% GDP growth for 2011E and maybe it’s just having cleared my head after being on vacation for a week, but that number is starting to feel too high, even if at the low end of consensus.
Daryl G. Jones