Friday, September 21, 2018

Merrill: "Existing Home Sales have Peaked"

by Calculated Risk on 9/21/2018 02:48:00 PM

A few excerpts from a Merrill Lynch research note:

We are calling it: existing home sales have peaked. We believe that the peak was at 5.72 million, reached in November last year. From here on, sales should trend sideways. If this is indeed the peak, it would be comparable to the rate we last saw in the early 2000s before the bubble set in. Here is the catch — while existing home sales have likely peaked, we do not think we have seen the same for new home sales. New home sales have lagged existing in this recovery and we believe there is room to run for new home sales, leaving builders to add more single family homes to the market.

The peak in existing home sales can largely be explained by the decline in affordability. With housing prices hovering close to bubble highs and mortgage rates on the rise, affordability has been declining.
emphasis added
CR Note: As I noted in July (see: Has Housing Market Activity Peaked? and Has the Housing Market Peaked? (Part 2)
First, I think it is likely that existing home sales will move more sideways going forward. However it is important to remember that new home sales are more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker's commission. There is usually some additional spending with an existing home purchase - new furniture, etc. - but overall the economic impact is small compared to a new home sale.

Also I think the growth in multi-family starts is behind us, and that multi-family starts peaked in June 2015. See: Comments on June Housing Starts

For the economy, what we should be focused on are single family starts and new home sales. As I noted in Investment and Recessions "New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight."

If new home sales and single family starts have peaked that would be a significant warning sign.   Although housing is under pressure from policy (negative impact from tax, immigration and trade policies), I do not think housing has peaked, and I think new home sales and single family starts will increase further over the next couple of years.