Strong Pending Home Sales Bust the Low Inventory Myth

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Today the National Association of Realtors reported on pending home sales.  The pending home sales index,  which is an indicator of future existing home sales, jumped to 112.3 showing 2.6% year over year growth.

https://www.nar.realtor/news-releases/2017/03/pending-home-sales-leap-55-in-february

Pending Home Sales Index jumped 5.5% to 112.3 in February from 106.4 in January.

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The previous existing home sales report also looked excellent. However, many housing pun expected better numbers and blamed low inventory for their  missed estimates. I had a different take on the report.

Existing Home Sales Look Excellent

https://loganmohtashami.com/2017/03/22/existing-home-sales-look-excellent/

Inventory not demand is typically listed as the factor that has prevented sales from going even higher.

Two charts illustrate why this is not the case.

1.Inventory of Homes – Months Supply

‘s Lawrence Yun expects ebbs and flows in activity as supply struggles to replace listings quickly going under contract

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2. Pending and Existing Home Sales Growth

Pending home sales and existing home sales growth. Notice demand gets better when supply gets lower. 2014 was the higher supply month year and demand went negative year over year.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2017/03/29/pending-home-sales-jump-in-february-highest-in-a-year

Pending Home sales vs Existing Home sales

Back in 2010 when I first started to write about housing economics I said  that “this housing cycle simply won’t have enough mortgage demand to have a real recovery once you exclude the cash buyers. However, the housing community will blame 2 things always because that’s what they do. 1. Tight lending; 2. Inventory.

Today, the data shows that mortgage purchase applications grew 4% year over year. Last year we had 25% plus year over year growth. Therefore, although mortgage purchase applications are still rising,  mortgage demand is flat to slightly higher.   This is why the cash buyers are a bigger percentage of existing home sales this year. We have still not hit 1999 levels in mortgage demand even though we have over 165 million people working,  mortgage rates are under 5% since early 2011, unemployment claims are at a 44 years low and  there are 5.6 million reported  job openings. Demographics matter for housing and 2008-2019 is demographic light. However, it’s 2017 and we are getting closer and closer to a better demographics.   Is it really supply or is it demand?

 
From Calculated Risk:
http://www.calculatedriskblog.com/2017/03/mba-mortgage-applications-decrease.html

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Remember that the only time the U.S. housing market had 6 month of supply for existing homes ( post 1996 when prices deviated from historical norms), was during the housing bust years of 2006 – 2011. It is much harder to move up  to a larger, more expensive home since 1996.  This housing cycle doesn’t have the exotic debts loans of 2003-2006 to help facilitate first time buyers or move up buyers as well. This new reality adds to below 6 months thesis that twenty years of data haves shown.  It might take another recession to get annual supply above 6 months for a few years.  However, back in 1999-2005 when demographics were better for demand, the below 6 months inventory didn’t impact sales.
months-supply-of-inventory-11211

Some analysts blame low monthly supply of homes for the weak recovery in new homes sales as well. In fact.  new home monthly supply is higher from 2012-2017 than any period from 1999-2005,  when demand was much greater.

NEW HOME SUPPLY

A must follow for those looking for solid housing data.

here’s a view in an appropriate shade of blue:

FANNIE MAE NEW HOME SUPPLY
Be patient with housing demand because at some point demand will look better than 1998, just not in 2017.

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing marketLogan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami