August 2014 Existing Home Sales Soft - All Cash Investors Blamed
Written by Steven Hansen
The headlines for existing home sales say that sales "activity remains stronger than earlier in the year, but fell last month as investors stepped away" - but still shows year-over-year growth as contracting. Our analysis is more negative - with sales growth declining month-over-month. However, the three month rolling averages for sales are negative but marginally accelerating.
- Sales growth decelerated 2.7% month-over-month, down 7.5% year-over-year – sales growth rate trend is marginally accelerating (but negative) using the 3 month moving average.
- Prices growth accelerated 0.1% month-over-month, Up 3.4% year-over-year – price growth rate trend is statistically unchanged using the 3 month moving average.
- The homes for sale inventory declined marginally this month, but is historically low for Augusts (but higher than inventory levels one year ago).
- Sales down 1.8% month-over-month, down 5.3% year-over-year.
- Prices up 4.8% year-over-year
- The market expected annualized sales volumes of 5.00 to 5.27 million (consensus 5.18) vs the 5.05 million reported.
November 2013 ended 28 straight months of improving year-over-year home sales volumes (unadjusted data) – and the data this month continued the data contraction year-over-year.
Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line) – 3 Month Rolling Average (red line)
The graph below presents unadjusted home sales volumes.
Unadjusted Monthly Home Sales Volumes
Here are the headline words from the NAR analysts:
Lawrence Yun, NAR chief economist, says sales activity remains stronger than earlier in the year, but fell last month as investors stepped away. "There was a marked decline in all-cash sales from investors,” he said. "On the positive side, first-time buyers have a better chance of purchasing a home now that bidding wars are receding and supply constraints have significantly eased in many parts of the country.”
Yun adds, "As long as solid job growth continues, wages should eventually pick up to steadily improve purchasing power and help fully release the pent-up demand for buying.”
NAR President Steve Brown says a gradual decline in investor activity, many who pay in cash, is good for the market and creates more opportunity for buyers who rely on financing to purchase a home.
Comparison of Home Price Indices – Case-Shiller 3 Month Average (blue line, left axis), CoreLogic (green line, left axis) and National Association of Realtors three month average (red line, right axis)
To remove the seasonality in home prices, here is a year-over-year graph which demonstrates a general decline in home price rate of growth - although this month appears unchanged.
Comparison of Home Price Indices on a Year-over-Year Basis – Case-Shiller 3 Month Average (blue bars), CoreLogic (yellow bars) and National Association of Realtors three month average (red bars)
Econintersect will do a more complete analysis of home prices when the Case-Shiller data is released. The graphs above on prices use a three month rolling average of the NAR data, and show a 3.1% year-over-year gain.
Homes today are still affordable according to the NAR’s Housing Affordability Index.
Unadjusted Home Affordability Index
This affordability index measures the degree to which a typical family can afford the monthly mortgage payments on a typical home.
Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite housing affordability index (COMPHAI) of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the COMPHAI then shows that this family is more able to afford the median priced home.
The home price situation according to the NAR:
The median existing-home price for all housing types in August was $219,800, which is 4.8 percent above August 2013. This marks the 30th consecutive month of year-over-year price gains.
According to the NAR, all-cash sales accounted for 23% of sales this month.
The percent share of first-time buyers remained unchanged in August from July at 29 percent. First-time buyers have represented less than 30 percent of all buyers in 16 of the past 17 months.
All-cash sales were 23 percent of transactions in August, dropping for the second consecutive month (29 percent in July) and representing the lowest overall share since December 2009 (22 percent). Individual investors, who account for many cash sales, purchased 12 percent of homes in August, down from 16 percent last month and 17 percent in August 2013. Sixty-four percent of investors paid cash in August.
Inventories improved – and are higher than the levels one year ago.
Total housing inventory at the end of August declined 1.7 percent to 2.31 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace. However, unsold inventory is 4.5 percent higher than a year ago, when there were 2.21 million existing homes available for sale.
Unadjusted Total Housing Inventory
Caveats on Use of NAR Existing Home Sales Data
The National Association of Realtors (NAR) is a trade organization. Their analysis tends to understate the bad, and overstate the good. However, the raw (and unadjusted) data is released which allows a complete unbiased analysis. Econintersect analyzes only using the raw data. Also note the National Association of Realtors (NAR) new methodology now has moderate back revision to the data – so it is best to look at trends, and not get too excited about each month’s release.
The NAR re-benchmarked their data in their November 2011 existing home sales data release reducing their recent reported home sales volumes by an average of 15%. The NAR stated benchmarking will be an annual process, and the 2010 data will need to be benchmarked again next year.
Also released today were periodic benchmark revisions with downward adjustments to sales and inventory data since 2007, led by a decline in for-sale-by-owners. Although rebenchmarking resulted in lower adjustments to several years of home sales data, the month-to-month characterization of market conditions did not change. There are no changes to home prices or month’s supply.
Existing home sales is one area the government does not report data – and it is easy to assume that an organization whose purpose is to paint the housing industry in a good light would inflate their data. However, Econintersect is assuming in its analysis that the NAR numbers are correct.
The NAR’s home price data has been questioned by others also. However, Econintersectanalysis shows a very good home price correlation to Case-Shiller, CoreLogic’s HPI, and LPS, especially when three-month moving averages are used – as shown in the graph earlier in this article.
Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).
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