Existing Home Sales Look Fine

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In my 2018 Economic & Housing prediction article I was looking for flat to negative growth for existing home sales.

“For 2018, I anticipate existing home sales to be in the range of  5.27 – 5.53 million units.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

In a recent interview on the David Lykken Show I discussed that we still might have too much hype on housing demand


Today’s NAR report showed a decline in sales last month.

“Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, sank 3.2 percent in January to a seasonally adjusted annual rate of 5.38 million from a downwardly revised 5.56 million in December 2017. After last month’s decline, sales are 4.8 percent below a year ago (largest annual decline since August 2014 at 5.5 percent) and at their slowest pace since last September (5.37 million).”

https://www.nar.realtor/existing-home-sales

Regarding the data in this report, Lawrence Yun, NAR chief economist, said

“the utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month.”

This is the rote response we typically  hear from the housing community that refuse to recognize the elephant in the room…. Housing tenure has doubled in this cycle.  People are staying in their homes longer than ever. The NAR and the national media blame the month to month decline entirely on low inventory but seem not to notice when the data contradicts this conclusion.  Sales have been highest in the cycle when inventory was low. To this point, we just had the best existing home sales prints of the cycle when inventory was at the lowest.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/02/21/existing-home-sales-slip-in-january

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From Calculated Risk:
http://www.calculatedriskblog.com/2018/02/nar-existing-home-sales-slip-32-percent.html
EHSInvJan2018
From Attom Data Solutions: ( A good website to get  housing data)

https://www.attomdata.com/attom-media/
HOUSING TENURE 2017

Reality is contradicting another widely held myth in housing.  A number of salespeople who represent themselves as housing analysts,  have been saying that current demand for housing  is “record breaking.”

But in truth, demand is at 1998 levels when I was a mere 22 years of age (that was a long time ago, folks). Since mortgage demand has been relatively mild in this cycle (to put it kindly) I wouldn’t be too concerned about the dip in existing home sales. We don’t have a record-breaking boom where the risk of an over investment thesis is currently in place.

From Calculated Risk.
 http://www.calculatedriskblog.com/2018/02/mba-mortgage-applications-decrease-in_21.html

MBAFeb212018

Purchase applications have held up well with higher interest rates and home prices. In 2014, inventory rose, sales went negative and purchase application were down 20% year over year and new home sales had the biggest miss from sales estimates ever working from a low bar of sales and low mortgage rates.

In the heat months of this year we have had prints of plus 8%, 4% and 3% year over year.  Growth is not gang-busters but it is modest and respectable — especially considering that last year during the heat months purchase applications were negative 1% -10% year over year.  This year we are working from higher sales, higher home prices and higher rates, so the data is holding up well. The reporting on housing tends to fall prey to the exuberant hyperbole of its sales people (read analysts). Then when that hype gets knocked down by the data from a single month, all hell breaks loose and no one knows what to think.

From 2008 through 2019 we do not and will not have the demographics or demand for a strong housing cycle.  In  the years 2020-2024, however, demographics for housing will improve and we may even reach 1,500,000 total housing starts. Until then, ignore the salespeople and remember that housing is more expensive this year than last and context is key to understanding sales trends as we are heading toward a record in terms of the length of this economic expansion.

Also of note in today’s report is that cash buyers fell YoY, but are still high for this stage of the cycle.  I am looking for 16%-19% cash buyers this year.  This would be a decline from last year, when we saw 20% + trend cash buyers as a % of sales. If cash buyers fall below 20% of the total market then purchase applications will need to make up the difference in order to still see growth in the market. This means that 3%-8% year over year growth in purchase application isn’t enough. You need the data to come in like what we saw in 2016 when purchase applications were up 25% plus in the heat months.

 2

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The real test for housing demand for 2018 can be seen in new home sales.  Here again, analysts are telling builders that the demand is out there and they should build more homes.

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Builders beware!

For new homes sales in 2018 I am looking for 2%-5% growth, because sales are still low.
I mean sales are really still low in context to over 154,000,000 people working, having the longest job expansion on record, the lowest interest rate curve on record with soon to be the longest economic expansion on record. Also, builders are trying to add in smaller homes and if this trend continues again in 2018 we could see higher than 5% growth.

However, if sales for new homes go negative year over year due to higher rates, then caution on the side of builders to keep to slow and steady growth will be the correct call.  As always with all housing data context is key and the builders were always correct to go slow and steady in this cycle coming off the massive over investment in the last housing cycle.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2018/01/25/november-new-home-sales-down-9-3-in-december

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As always, monthly supply in this cycle has been higher every month than in the previous cycle outside of one month in June of 2000 for new homes.

From Fred:
https://fred.stlouisfed.org/series/MSACSR
JULY 2018 new home supply

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

About Logan Mohtashami:

https://loganmohtashami.com/about/

 

22 thoughts

  1. Clarification to the above comment:

    As the numbers move higher and lower on the graph, what implications does this data convey for the state of the U.S. housing market?

    Does a supply number over 6 mean it’s a buyer’s market?

    Does a supply number under 6 means its a seller’s market?

    Thank you

    Robert Campbell
    San Diego, CA

  2. We do have a big difference between new home monthly supply than existing home monthly supply. We actually broke over 6 months last year but the new home sales market but that sector has a different make up of supply and demand than existing homes. Existing homes monthly supply only broke above 6 months in years 2006-2011, the housing bust years. This was forced selling into a weaker demographic patch with an over investment thesis and demand on speculation. So, if you’re looking for when prices will fall keep an eye on monthly supply of existing homes at or above that 6 month level. The rate of growth can cool down with higher supply but going negative means you need near 6 months and higher for a year like we saw from 2006-2011.

  3. Because the chart I’m referring shows existing home supply, and not new home supply, that’s what I want to focus on.

    Using 6 months supply as an equilibrium point, I’m well aware what signals were generated by the movement in existing home supply during the 1995 to 2017 period. I think we can both know that it did a respectable job of gauging the strength or weakness in the U.S. housing market.

    However prior to 1995, namely from 1960 to 1995, I don’t see where the chart was useful at all in telling us anything meaningful about the state of the U.S. housing market.

    If you believe otherwise, please share your thoughts with me.

    Thank you

    Robert Campbell
    San Diego, CA

    1. 1996 home prices deviated from historical norms from CPI inflation, post that time frame is when 6 months supply was abnormal outside the housing crash years. The difference between this cycle and last.

      A. We had more demand in the last cycle
      B. Tenure of housing has doubled

      That is a real big deal for supply now. Demographics for housing was good from 1996-2005, lower rates and demand worked a long with housing start data from 1994-2005 . Prime age labor force growth peaked in 2007, declined and only this year are we back to trend 2007.

      If you want to see what I am talking about

      Take this chart

      Housing starts 1994-2005
      Mortgage purchase applications from 1996-2005
      Log scale chart out home prices vs CPI inflation cumulative and you can see the deviation in home prices and Owners’ Equivalent Rent of Residences.

      When you look at those data line together and add new homes sales to the mix, it presents a clear macro picture

    1. The U.S. has replacement workers and buyers for housing. However, anyone who tells you they can forecast correctly 3-5 years out is more a salesmen rather than an economist. Variables that account for macro data work can change so I only do yearly predictions and like 90-120 forecast as the economic cycling turning can be seen with 4 months of data.

  4. Good answer to my question.

    I have another question however:

    You say the working age labor force is “back to trend” after the 2006-2011 decline in housing prices. Then why are existing homes sales at 5.5 million per year in 2018 vs. 7.5 million per year in 2006?

    1. Housing demographics were good from 1996-2005 as you can see in the purchase application data. However, 2003-2006 was the speculation part of the housing cycle so the data lines from those years I would take with a grain of salt because that is when the exotic debt and investors speculation with the cash out boom took place. Also, that 5.5 million number, that is also boosted by a record breaking cycle of cash buyers, mortgage demand itself is lower than than that 5.5 million trend.

      Biggest age group in America today area ages 21-27 and the M’s have been buying homes in this cycle but that is when they get to ages 31-35. Average age of a first time home buyer now is 32.

      Core thesis of what I said about housing in this cycle stayed true the entire cycle that from years 2008-2019, you simply won’t have enough mortgage demand to have a real recovery. This is why housing starts, new home sales, single family starts and mortgage demand hasn’t hit 21st century levels yet. You will have young buyers replacement the ones in this cycle coming up in years 2020-2024. However, that doesn’t fix the housing tenure issue, that is the big X factor going out in the next decade. Still 2018 should be another year of 6 million sales roughly ( give or take 100-200K up or down with a 80% plus mortgage buyer profile for both existing and new homes combined

  5. According to N.A.R., first time home buyers (i.e. the M’s, who are the biggest demographic group in America today) fell from 35% in 2016 to 33% in 2017, and are now at 29%.

    What will drive existing home sales up to 6 million in 2018?

    1. That is a survey finding, Millennials in the raw data are the biggest buyers just because of the fact that first waive hit 31-35 the average age is 32 for the first time buyer. They’re bigger than Gen X and Boomers aren’t that big in the market. So you have to adjust the Demo’s for housing demand.

      Existing home sales Highest Print last year, before the adjustment was 5,8100,000 total sales highest print was 6,500,000 last year, the year ended at 6,100,000. However, for existing home sales to get over 6,000,000 this decade which only two years left, you need housing tenure to stop rising. It’s the move up buyer than is a bigger issue, first time home buyers of age actually buy but that is a age 31-35 data line we are still way to big young as the biggest demographic group in America is still ages 21-27, it will be 4-8 years out before they get to home buying age.

  6. So the M’s aren’t at the home-buying age yet. I see your point.

    Another question good sir:

    “Real” home price appreciation has been outpacing “real” wage growth since 2011 – and in Q4 2017, that gap became more extreme than at any point in time since at least 1960.

    If these trends continue, how will the M’s be able to enter the home buying market in 4 to 8 years?

    Won’t any significant rise in home buying be driven primarily by move-up buyers?

    1. Huge difference between college educated dual incomes and less educated and less skilled incomes.

      Base pay wage and wage growth has been come from the educated class, these are your home buyers, while low skill and low educated incomes start low and are more for renting.

      We are graduating more college people than ever and the dual household incomes should be fine because while real home prices aren’t back to 2006 levels we have to remember neither are interest rates either and for this segment of the population they just need to service the debt which is fixed against rising wages. Too often I see people make the mistake of tracking low educated Americans and mixing them up into the home buyer population. Those are more permanent renters for life or 2nd wage earners marrying up. Now if interest rates get back to 5.875% and higher that does impact real affordability. You would need cost of living wage to move up even for the educated class to offset that type of inflation if home prices are still rising into that higher interest rate cycle

  7. A couple of points for your consideration …

    In Sept 2017, Forbes reported that “millennial unemployment and underemployment is more than double the national average.”

    “Despite being the largest generation in the workforce today, average millennial salaries are disproportionately low compared to the national average—and are 20 percent lower than baby boomers’ salaries when they were the same age.”

    Even worse perhaps – in addition to having an average $35K of student debt, 65-70% of all college grads cannot get a job in the industry group they have a degree in.

    1. Median age of a first time home buyer is 32
      Median Household Income 75K
      41% have student loan debt and that debt avg balance is 29K
      College educated Americans have less than a 2.5% unemployment rate and their median incomes are much higher. The very last group of people I am worried about are college educated Americans, the own the homes, 401K, cars and are the strongest and wealthiest middle class the world has ever seen and they own most of the debt in this country. The poor and struggling cash flow Americans didn’t go to college or have limited skill set values.

  8. The U.S. Bureau of Census reported that median household income in the U.S. was $59K in 2016, not $75K.

    If we can agree that the majority of first time home buyers are probably M’s, Forbes reported in Sept 2017 that the M’s are making 20% less than the national average, not 30% more.

    Your thoughts?

  9. I just found this, and you are right. Facts rule!

    The New York Times’ Real Estate section crunched data from the National Association of Realtors and came up with a profile of first-time buyers showing that first-time buyers are still generally millennials, albeit pretty successful ones.

    First-time buyers are, on average, 32 years old and make $72,000 a year.

    That makes them more well-off than the general population, since $72,000 is roughly the median income for a middle-class family of three. The overall median household income is $56,516.

    Thanks for the chat

  10. One more thing to add to this discussion …

    … And it’s this: while the M’s may have the financial ability to buy a home as a married couple … they may not have the desire to do this.

    According to a recent report from the Census Bureau, M’s in the United States have a different set of values on social and economic topics than the generations before them.

    The report compared data about relationships, education and economic accomplishments of modern Americans ages 18 to 34 to those of the same age group in 1975.

    “A large majority of young Americans now believe education and economic accomplishments are extremely important parts of adulthood, and more than half — 55% — believe marrying and having children is not very important.”

    “That mentality differs from the values of 40 years ago. In 1975, 8 in 10 people were married by the time they turned 30. Now, 8 in 10 are married by the time they turn 45”

    So now we get down to the real nitty-gritty of economics, which is a study of human behavior. 🙂

    Thanks again. I enjoy discussing economics and the housing market with you.

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