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Why existing home sales are flat but first-time homebuyers return

Brent Nyitray, CFA, MBA

Starts, permits, sales, and prices as spring selling season begins (Part 4 of 5)

(Continued from Part 3)

Existing home sales decrease to a 4.59 million pace in March

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 4.59 million in March.

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

At the end of January, there were 1.99 million existing homes for sale, representing a 5.2-month supply. This is higher than the 4.7-month supply a year ago. A level of 6 to 6.5 months indicates a balanced market. So, while inventory is building, we’re still at tight levels. 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 $198,500, which is up 7.9% year-over-year. 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

Fourth quarter earnings for the builders are just beginning. Lennar (LEN) and KB Home (KBH) both have November fiscal years and have reported already. Lennar came in better than expected, while KB Home has more exposure to the first-time homebuyer and noted a drop in traffic. Other builders with exposure to the first-time homebuyer are D.R. Horton (DHI), Standard Pacific (SPF), and PulteGroup (PHM).

First-time homebuyers accounted for 30% of all sales—well below their historical level of 40%, but still up from 28% in February. 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 5

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