Wednesday, December 21, 2016

A Few Comments on November Existing Home Sales

by Bill McBride on 12/21/2016 02:00:00 PM

Earlier: Existing Home Sales increased in November to 5.61 million SAAR

Several key points:

1) The strong year-over-year increase was related to the implementation of the new TILA-RESPA Integrated Disclosure (TRID) in November 2015. Note: TILA: Truth in Lending Act, and RESPA: the Real Estate Settlement Procedures Act of 1974. The impact from TRID sorted out quickly (sales rebounded from 4.86 million SAAR in November 2015 to 5.45 million SAAR in December 2015) SAAR: Seasonally Adjusted Annual Rate.

2) These November existing home sales were mostly in escrow - with mortgage rates locked - before the recent increase in mortgage rates (rates started increasing after the election).

With the recent increase in rates, I'd expect some decline in sales volume as happened following the "taper tantrum" in 2013.   So we might see sales fall to 5 million SAAR or below over the next 6 months.  That would still be solid existing home sales.   We might also see a little more inventory in the coming months, and therefore less price appreciation.

Usually a change in interest rates impacts new home sales first, because new home sales are reported when the contract is signed, whereas existing home sales are reported when the contract closes.  So we might see some impact on new home sales for November or December.

3) As usual, housing economist Tom Lawler was much closer to the NAR reported sales than the consensus.  Lawler forecast 5.60 million SAAR, the NAR reported 5.61 million.  The consensus was 5.53 million.

4) On inventory, I expected some increase in inventory, but that didn't happened.  Inventory is still very low and falling year-over-year (down 9.3% year-over-year in November). More inventory would probably mean smaller price increases and slightly higher sales, and less inventory means lower sales and somewhat larger price increases.

Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. Last year, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.

Of course low inventory keeps potential move-up buyers from selling too.  If someone looks around for another home, and inventory is lean, they may decide to just stay and upgrade.

I've heard reports of more inventory in some coastal areas of California, in New York city and for high rise condos in Miami.  But we haven't seen a change in trend for inventory yet.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Existing Home Sales NSAClick on graph for larger image.

Sales NSA in November (red column) were the highest for November since 2006 (NSA).

Note that sales NSA are in the slower Fall period, and will really slow seasonally in January and February.

Since sales rebounded in December 2015, following the implementation of TRID, I wouldn't be surprised if sales are down year-over-year in December 2016.