Negative Existing Home Sales Look Just Right

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In 2017, I wrote:

“For 2018, I anticipate existing home sales to be in the range of  5.27 – 5.53 million units.  If we end the year showing negative growth, with rising inventory once again, don’t worry, be happy. This would be “normal” especially when purchase applications are still trying to party like it is 1999.”

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

Before I discuss today’s existing home sales report, I’d like to address a few points.

From the NAR chief economist: 

Yun, NAR’s chief economist, says increasing housing inventory has brought more buyers to the market. “After six consecutive months of decline, buyers are finally stepping back into the housing market,”

November Supply
So now, according to the NAR, increased supply has brought buyers into the market, even though sales trends have been negative year over year while inventory is up year over year in some of the reports.

I have longed warned my readers than the month to month reporting by NAR and others should be viewed with caution and this is a great example of that.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/11/21/existing-home-sales-up-in-october-after-6-months-of-declines
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Last year when housing pundits were saying the token standard housing line that there was

“Record Breaking Demand, No Homes To Buy”   we found out soon enough that was not the case.

I used last year’s November report as my best example. At that point we had 5,7200,000 existing home sales and inventory was at cycle lows in a non seasonal buying period.  The best demand prints come with cycle low inventory. Does it make sense that we have no homes buy when people are able to buy more homes as inventory falls? This was the case in the previous cycle when annual months of inventory was always below 5 months but somehow millions of more homes were sold. We didn’t have the housing tenure issue back then like we do now.

Monthly Supply

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My interview on Bloomberg Financial a few months ago.

https://www.bloomberg.com/news/audio/2018-07-30/us-housing-market-continues-its-slow-steady-growth-mohtashami

2018 Housing Tenure

Data from next month’s report provide the final nail in the coffin, and put an end people saying that home sales will be booming as soon as we get more supply. Be mindful that next month’s report will have a hard year over year comp on both the sales side and the supply side.

Existing home sales look just right to me, when one takes in consideration the economic environment and take the opinions of the extreme bulls and bears out of the equation.

From the NAR:

Existing-home sales increased in October after six straight months of decreases, according to the National Association of Realtors®. Three of four major U.S. regions saw gains in sales activity last month.

Total existing-home sales1https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.4 percent from September to a seasonally adjusted rate of 5.22 million in October. Sales are now down 5.1 percent from a year ago (5.5 million in October 2017).

The sales range for this year has been right in line with my expectations of flat to negative growth with inventory increasing year over year. I had similar take for last year except for the increases in inventory, year over year. Last year sales were up slightly because cash buyers as a percentage of sales were flat to positive, which I didn’t expect to see. As long as cash buyers stay at 20% of sales then the sub-par mortgage demand will not keep existing home sales from going under 5,000,000.  Without the cash buyers, however, we will need more mortgage demand. For the majority of this year purchase application data has been positive on a year over year basis but we have had the biggest year over year declines of 3% and 5%  recently. At this point in the year the purchase application data isn’t that important.  However, for 2019, keep an eye out on the year over year purchase application data from the 2nd week of January to the first week of May. That period will provide the best forward-looking indicator for existing home sales for the year. For all the negative hype on housing this year, 2018 purchase application data is at cycle highs while nominal home prices are at all time highs and mortgage rates stayed high all through spring and summer. Still, we are only at 1998 levels, even with this is long economic expansion and mortgage rates roughly staying below 5% since early 2011.

From Calculated Risk
https://www.calculatedriskblog.com/2018/11/mba-mortgage-applications-decreased.html?

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The next new home sales report is important not only in terms of the housing market but also for the economy in general. We had a recent big spike in monthly supply to over 6.5 months.  That number has been my rule-of-thumb signal for a red flag always.  I don’t want to make too much out of this yet because, typically, when we see a spike in supply the next report corrects it back to trend. But if supply stays above 6.5 months in the next report and sales trend are negative, then don’t expect the builders to increase their current slow pace of housing starts. We will still need at least 4 months of this trend to stick to make a bigger issue out of it. However, I wanted to make sure people got this heads up early on.

More on that topic here:

Single Family Starts Are At Risk For 2019 

https://loganmohtashami.com/2018/11/20/single-family-starts-are-at-risk-for-2019/

Have a wonderful Happy Thanksgiving everyone!  My best wishes go even to my American bear friends who have been wrong about America since 1790.

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