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Why did existing home sales drop for the first time in 29 months?

Brent Nyitray, CFA, MBA

Good news for housing? November sales, starts, and permits (Part 1 of 3)

Existing home sales drop to a 4.9 million pace in November

The National Association of Realtors (or NAR) reports existing home sales once a month. The seasonally adjusted number reports completed transactions in single-family homes, condominiums, townhomes, and co-ops. The report includes such data points as existing home sales, inventory of houses for sale, median house price, mortgage rates, and median time on the market. Existing home sales were an annualized 5.19 million in October.

Restricted supply has been the theme of the U.S. housing market over the past year

At the end of August, there were 2.09 million existing homes for sale, representing a 5.1-month supply. This is higher than the 4.9-month supply in October. As professional investors have become major players in the real estate market, we’re seeing bidding wars for properties in the hardest-hit markets, like Phoenix, and even strong markets, like Washington, DC. For all the fears that a flood of properties would hit the market and drive down prices, the opposite problem has happened. That said, NAR forecasts that the jump in rates will begin to affect affordability in high-cost areas like California and the New York City metropolitan area.

Prices continue to rise

The median sale price for an existing home was $196,300, which is up 9.4% year-over-year, but a small drop month-over-month. The housing inventory supply of 5.1 months signals a market tilted more towards sellers. A six-month inventory typically means balance. Last year at this time, there were approximately 4.8 months worth of supply. There’s definitely more demand than supply in the market, and some hot markets, like San Francisco and Phoenix, are experiencing the bidding wars we used to see in 2006. This increase in median home prices is somewhat overstated in that most of the transactions are concentrated in a few areas. Nationwide, we’re not seeing such large increases in prices.

Homebuilder earnings were generally strong

Second quarter earnings for the builders were generally strong, but we began to see some cracks in the foundation for the first-time homebuyer. Toll Brothers (TOL), Lennar (LEN), and Standard Pacific (SPF)—which have a lot of West Coast exposure—reported strong increases in revenues and orders. Those with a focus on the first-time homebuyer and a lot of exposure to the East Coast, like PulteGroup (PHM) and Beazer (BZH), did worse.

First-time homebuyers accounted for 28% of all sales—well below their historical level of 40%. The first-time homebuyer has been absent due to tough credit conditions, heavy student loan debt, and a difficult labor market. As those circumstances change, a lot of pent-up demand will release, which should drive homebuilder earnings for quite some time. Also, restricted supply has been a major feature of the current housing market. If there’s a shortage of existing properties for sale, buyers will naturally turn to new construction.

Continue to Part 2

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