In my 2017 Housing Prediction article published in December 2016, I wrote this regarding existing home sales:
“… I expect 2017 to look much like 2016 in terms of existing home sales. We will eventually see a push in demand driven by changes in demographics but that is still a few years away. For 2017, I predict existing home sales to come in around 5.15 to 5.45 million. Even if 2017 finishes with negative growth, this will not be cause to worry. Our path is slow until demographics get better.”
Today, the NAR reported that existing home sales were up to a seasonally adjusted annual rate of 5.48 million. This was an increase from the revised number for the previous month of 5.37 million and down 0.9% year over year. Any print over 5,450,000 is a beat in my book, so this report was solid.
From the NAR: https://www.nar.realtor/newsroom/existing-home-sales-grow-20-percent-in-october
Total existing-home sales increased 2.0% to a seasonally adjusted annual rate of 5.48 million in October.
We saw a boost in existing home sales following the hurricanes in Houston and Florida but after the next report we can expect little to no hurricane impact on the numbers.
What about the effect of low inventory?
My theme for existing home sales in 2017 is that we would see flat to negative growth in sales – but this has little to do the level of inventory in this cycle.
In fact, existing home sales hit a cycle high at the same time that inventory hit a cycle low back in January of this year – an off-season time for home sales.
Further to this, inventory had been rising during the more seasonal time frame, but this didn’t create any growth in sales. Unlike last year, in 2017 we haven’t seen year over year total sales growth. In the most recent years the only time we had rising inventory was back in 2014 and sales went negative year over year. Inventory has been falling from 2014 levels while demand has been rising. It is rare to see rising inventory and rising sales together.
Even in the last cycle when demand was much stronger, we never had supply go over 6 months. The old marketing economic theory that less than 6 months of supply doesn’t favor growth hasn’t been true for two decades but for some reason the housing community still clings to it.
This break off happened in 1996 which was when home prices deviated from historical norms. The only time we had 6 months supply plus were the housing bust years so rising inventory actually has been proven to go along with lower demand than facilitating demand.
To review again, existing home sales had its highest cycle print this year in January when inventory hit a cycle low in terms of monthly supply and supply has risen from that point but not demand. This was the call for 2017 and this looks exactly where housing should be.
Total housing inventory at the end of October decreased 3.2% to 1.80 million existing homes available for sale. Unsold inventory is at a 3.9-month supply at the current sales pace, which is down from 4.4 months a year ago.
The number of cash buyers in the housing market in 2017 has been unexpected and interesting. I predicted that cash buyers would drop to 16%-19% percent of the total market place and cause only a slight uptick in purchase application demand. The year over year growth in purchase applications has been one of the weakest years of growth in 20 years, still at 1998 levels. However, the percentage of cash buyers actually grew in some months and only fell below 20% one time this year. So demand from cash buyers is stronger than I expected. In this month’s report we did see a year over year decline but still cash buyers still made up 20% of the total market.
First-time buyers were 32% of sales in October; Individual investors purchased 13% of homes in October; All-cash sales were 20% of transactions in October; Distressed sales – foreclosures and short sales – were 4% of sales in October.
This report shows that existing home sales are fine, as long as one maintained realistic expectations. Housing starts lost some steam due to the decline in starts for multifamily structures. Our demographics for housing will get better but right now we need to wait for move up buyers to build more selling equity. This will be an issue for some time to come and already housing tenure is at all time highs.
Happy Thanksgiving everyone! (even you Anti American bears who keep yapping about a collapse of America and those MMT people who can’t read loan growth data properly
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan 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