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Thursday, September 19, 2013

Comments on Existing Home Sales

by Calculated Risk on 9/19/2013 02:27:00 PM

First, the higher than consensus headline sales number was not surprising, although this was even above Lawler's estimate (see Lawler: Early Look at Existing Home Sales in August).

Second, the strong sales rate in August 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 until the 2nd half of May, and were still below 4% in mid-June (see Freddie Mac Weekly Primary Mortgage Market Survey®), so buyers could have locked in rates in early June - and pushed to close in August.

I expect sales to decline in September, and a further decline in a couple of months. From CNBC:

"We are getting early signals from lock boxes that show a significant change in direction in August," said Lawrence Yun, chief economist for the National Association of Realtors, referring to the small key boxes that hang on the doors of for-sale homes. The number of times they were opened in August dropped dramatically, signaling a big drop in potential buyer traffic.
But that doesn't mean the housing recovery is over. What matters for jobs and the economy are new home sales, not existing home sales.  And I expect the housing recovery to continue.

The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased slightly in August from July, and is only down 6.3% from August 2012.  This is 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.  Inventory usually declines seasonally in September from August, but I think the decline will be less than usual this year.   Last year, the NAR reported September inventory at 2.17 million.  For August 2013, the NAR reported  2.25 million.  So inventory could decline a little in September and still be up year-over-year.  I'm guessing inventory will be up year-over-year in the September report (or maybe October).

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 13.2% from August 2012, but conventional sales are probably up close to 30% from August 2012, and distressed sales down.  The NAR reported (from a survey):
Distressed homes – foreclosures and short sales – accounted for 12 percent of August sales, down from 15 percent in July, and is the lowest share since monthly tracking began in October 2008; they were 23 percent in August 2012.
Although this survey isn't perfect, if total sales were up 13.2% from August 2012, and distressed sales declined to 12% of total sales (12% of 5.48 million) from 23% (23% of 4.84 million in August 2012), this suggests conventional sales were up sharply year-over-year - a good sign. 

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

Existing Home Sales NSAClick on graph for larger image.

Sales NSA in August (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 still 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).

Earlier:
Existing Home Sales in August: 5.48 million SAAR, 4.9 months of supply