Why were last month’s existing home sales figures disappointing?

Market Realist

Do last week’s economic releases support the Fed’s tapering stance? (Part 8 of 10)

(Continued from Part 7)

February home sales

Existing home sales estimates for the month of February, 2014, were released by the National Association of Realtors (or NAR) on Thursday, March 20. The Seasonally Adjusted Annual Rate (or SAAR) for existing home sales came in at 4.60 million units, in line with consensus estimates, and the lowest level since June 2012. Existing home sales in the month of February 2014, were down 0.4% month-on-month, and 7.1% year-on-year. The year-on-year decline of 7.1%, is the sharpest decline since May 2011, and the fourth consecutive month when existing home sales have posted year-on-year declines, the decline in January 2014, coming in at 5.1%.

What are existing home sales?

Existing home sales are a monthly release, issued by the National Association of Realtors (or NAR). Total existing home sales represent completed transactions that include single-family homes, townhomes, condominiums, and co-ops.

Key highlights

Price increases for existing homes were cited as a key reason for the decline in existing home sales for February, 2014. The median price for a single-family home came in at $189,200 in February 2014, up 9.1% year-on-year and 0.6% month-on-month.

All-cash sales increased in February to 35% of all transactions, up from January’s 33%. This was despite the national average commitment rate for 30-year fixed-rate conventional mortgages declining to 4.30% in February from 4.43% in January. The rate was 3.53% in February 2013 (Source:Freddie Mac). If an increase in all-cash sales is going to be an ongoing trend, this may impact ETFs like the iShares Barclays MBS Fixed-Rate Bond Fund (MBB) and the Vanguard Mortgage-Backed Securities Index Fund (VMBS). Both ETFs provide exposure to investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

The median time for which homes were on the market declined to 62 days in February, compared to 67 days in January and 74 days in February, 2013.

Limited inventory at the lower end of the market has hit first-time buyers. This may lead to sales spurts later on in the year and benefit ETFs like the iShares US Home Construction ETF (ITB). ITB tracks the performance of the Dow Jones U.S. Select Home Construction Index which measures the performance of the home construction sector of the U.S. equity market. D.R. Horton (DHI) and KB Home (KBH) are construction companies specializing in entry-level homes, and figure amongst the top ten holdings in ITB with 9.82% and 2.99% of assets, respectively.

Geographically, the North-East and the Mid-West regions posted sales declines of over 12% year-on-year. However, sales in the West and South, the biggest real estate markets, rose 5.9% and 1.5% month-on-month, respectively. Even then, both markets are down by 0.5% (South) and 10.1% (West) on a year-on-year basis.

Part 9 discussed the only employment-related indicator released last week.

Continue to Part 9

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