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Existing Home Sales Rebound in October: Relief for Builders?

After declining for six consecutive months, sales of previously owned homes perked up in October, rising in three of the four major U.S. regions. It seems that a flourishing economy is giving little boost to Americans when higher home prices and rising mortgage rates are somewhat creating hurdles for buyers.

Exchange-traded funds or ETFs that track the homebuilding industry jumped on Wednesday, after the news release. iShares U.S. Home Construction ETF ITB gained 1.9%, the SPDR S&P Homebuilders ETF XHB increased 1.4% and Invesco Dynamic Building & Const ETF PKB was also up 1.4%.

Prominent homebuilders such as D.R. Horton Inc. DHI, Toll Brothers, Inc. TOL, KB Home KBH Lennar Corp. LEN and PulteGroup Inc. PHM surged 2.7%, 2.8%, 2.9%, 1.5% and 1.3%, respectively, in the last session. All these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Is Robust Economic Growth Supporting Gain?

Existing-home sales were 5.22 million at a seasonally adjusted annual rate in October, the National Association of Realtors (NAR) said on Wednesday. This was up 1.4% from the September mark. However, existing home sales, which account for about 90% of U.S. home sales, plunged 5.1% on a year-over-year basis during the month.

Also, October’s median sales price grew 3.8% from the comparable period a year ago to $255,400, marking the 80th straight month of year-over-year gains.

Inventory continues to slip, leaving less homes for future sales. Total housing available for sale declined to 1.85 million in October from 1.88 million existing homes on the market in September. But the reading was up from last year’s total of 1.80 million.

Unsold inventory is at a 4.3-month supply level, at the current sales pace, which is down from 4.4 months in September, but up from 3.9 months a year ago.

It’s quite clear from the latest housing data that despite this much-needed monthly sales gain, sales are still down from the year-ago level. Rising mortgage rates and high prices of homes from inventory squeeze are indeed creating hurdles for buyers (mostly first-time buyers).

First-time buyers were 31% of sales in October, down from 32% in September and October of last year. NAR revealed that the annual share of first-time buyers remained at 33%.

Mortgage Rate Slips the Most in Four Years

All is not lost in this distressed market. As revealed by Freddie Mac on Wednesday, the average rate on the benchmark 30-year, fixed-rate mortgage fell to 4.81% for the week ending Nov 21, down from 4.94% a week earlier. This was the biggest weekly drop since January 2015 and may create room for potential home buyers.

Meanwhile, homebuilders have been indicating continued demand for new homes. Notably, new home sales have tumbled since spring, including four consecutive month-over-month declines since June. That said, per the latest report from Zillow Group, new home sales should rise 2.9% in October from the September level. However, the forecast still represents a 7.9% year-over-year decline. (Also read: Can Builder Confidence Recover From November’s Sharp Plunge?)

Bottom Line

The latest monthly sales gain along with the decrease in mortgage rates have indeed offered some hope for a modest housing recovery. But in order to address affordability issues, the Federal Reserve is required to “re-evaluate its monetary policy of tightening credit” to avoid any “lasting damage to the economy,” as pointed out by Lawrence Yun, NAR’s chief economist.

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Lennar Corporation (LEN) : Free Stock Analysis Report
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D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
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SPDR-SP HOMEBLD (XHB): ETF Research Reports
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