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Must-know: Existing home sales rise on spring thaw, home price moderation

Phalguni Soni

Overview: Last week’s economic releases—housing market takes center stage (Part 5 of 7)

(Continued from Part 4)

Home sales reverse three months of declines

Existing home sales estimates for the month of April, 2014, were released by the National Association of Realtors (or NAR) on Thursday, May 22. Existing home sales in April, 2014 increased 1.3% month-over-month (or MoM) to 4.65 million units, on a Seasonally-Adjusted Annual Rate (or SAAR) basis. The positive numbers in April, might have increased due to lower sales in 1Q14.

However, home sales were down 6.8% year-over-year (or YoY). This is the sixth month in a row that home sales have declined on an annual basis. The adverse weather in the first quarter of 2014, is widely believed to have skewed annual comparisons. Home sales are down 6.6% in the first four months of 2014, compared to the same period in 2013.

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.

Buyers now have more choice—home inventories increase

Total inventories of new homes finally increased by 16.8% to 2.29 million homes. This implies a 5.9-month supply going by the existing selling pace. One of the major issues facing the housing market was lower supply, meaning lesser choices for buyers, particularly the first-time homebuyer. An increase in home inventories, might spur future home purchases.

According to Lawrence Yun, NAR chief economist, “Some growth was inevitable after sub-par housing activity in the first quarter, but improved inventory is expanding choices and sales should generally trend upward from this point,” he said. “Annual home sales, however, due to a sluggish first quarter, will likely be lower than last year.”

Pace of home price increases appears to be moderating

Home price gains were recorded at 5.2% compared to April 2013. This compares to an average of 8.6% home price increase in the first quarter of 2014. The median home price was reported at $201,700 in April, 2014. Lower home price increases would increase the affordability of homes and spur sales, all else equal.

Financing considerations for homebuyers

The share of all cash purchases has increased this year and April was no exception. All-cash purchases increased 33% in the first quarter of 2014, on a YoY basis. The national average commitment rate for a 30-year, conventional, fixed-rate mortgage came in at 4.34% in April—the same as the previous month. Mortgage rates have increased from 3.45% in April, 2013—which has had a significant impact on the demand for housing and mortgage financing, leading to the rise in all-cash purchases.

Other factors remaining constant, an increase in mortgage rates and the trend for all-cash purchases, would negatively impact the prices of ETFs like the iShares Barclays MBS Fixed-Rate Bond Fund (MBB) and the Vanguard Mortgage-Backed Securities Index Fund (VMBS), which invest in mortgage-backed securities.

Implications for home construction companies

While interest rates for mortgages have increased over the past year, they are still low compared to pre-recession levels. A combination of low rates, an improving labor market, and increased buyer choices should give a boost to housing sales in the remainder of the year. An increase in housing sales would favorably impact homebuilders. Investors can gain exposure to residential construction companies like Lennar (LEN) and Toll Brothers (TOL) by investing in ETFs like the iShares U.S. Home Construction ETF (ITB) which tracks the performance of the Dow Jones U.S. Select Home Construction Index. ITB represents a convenient way to invest in both Lennar (LEN) and Toll Brothers (TOL) while gaining exposure to other publicly-listed home construction companies.

Last week, new home sales data for the month of April was also released. To read the key takeaways from the report, please continue reading the next section of this series.


Continue to Part 6

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