by Bill McBride on 8/21/2013 11:20:00 AM
Wednesday, August 21, 2013
Comments on Existing Home Sales: Too early to see impact of higher mortgage rates, Inventory has Bottomed
First, the headline sales number was no surprise (see Lawler: Early Look at Existing Home Sales in July).
Second, the strong sales rate in July is not a sign that higher mortgage rates have had no impact on sales. The NAR reports CLOSED sales, and the usual escrow period is 45 to 60 days. Mortgage rates didn't start increasing sharply until the 2nd half of May (see Freddie Mac Weekly Primary Mortgage Market Survey®), so buyers could have locked in rates in May - and pushed to close in July. My guess is sales will be down in August reflecting higher mortgage rates.
The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 5.6% in July from June, and is only down 5.0% from July 2012. This fits with the weekly data I've been posting.
This is the lowest level of inventory for the month of July since 2002, but this is also the smallest year-over-year decline since March 2011. The key points are: 1) inventory is very low, but 2) the year-over-year inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.
When will the NAR report a year-over-year increase in inventory? Soon. Right now I'm guessing inventory will be up year-over-year in September.
Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.
Another key point: The NAR reported total sales were up 17.2% from July 2012, but conventional sales are probably up close to 30% from July 2012, and distressed sales down. The NAR reported (from a survey):
Distressed homes – foreclosures and short sales – accounted for 15 percent of July sales, the same as in June and matching the lowest share since monthly tracking began in October 2008; they were 24 percent in July 2012.Although this survey isn't perfect, if total sales were up 17.2% from July 2012, and distressed sales declined to 15% of total sales (15% of 5.39 million) from 24% (24% of 4.60 million in July 2012), this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying.
The following graph shows existing home sales Not Seasonally Adjusted (NSA).
Click on graph for larger image.
Sales NSA in July (red column) are above the sales for 2007 through 2012, however sales are well below the bubble years of 2005 and 2006.
The bottom line is this was a solid report, but it is too early to tell about the impact of higher mortgage rates on sales. Inventory is still low, but the year-over-year decline in inventory is decreasing - and will turn positive soon (indicating inventory bottomed earlier this year).
• Existing Home Sales in July: 5.39 million SAAR, 5.1 months of supply