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posted on 23 January 2015

December 2014 Existing Home Sales Had a Relatively Strong Month for a Change

Written by Steven Hansen

The headlines for existing home sales say that sales picked up - with sales improving for a change. Our analysis of the unadjusted data shows the unadjusted three month rolling averages for sales gaining more ground in positive territory after being in contraction most of 2014.

Econintersect Analysis:

  • Unadjusted sales growth accelerated 9.5% month-over-month, up 6.5% year-over-year - sales growth rate trend is accelerating using the 3 month moving average.
  • Unadjusted price growth decelerated 0.5% month-over-month (normal for this time of year), up 3.7% year-over-year - price growth rate trend is marginally improving using the 3 month moving average.
  • The homes for sale inventory declined marginally this month, and is historically low for Decembers (but higher than inventory levels one year ago).

NAR reported:

  • Sales up 2.4% month-over-month, up 3.5% year-over-year.
  • Prices up 6.0% year-over-year
  • The market expected annualized sales volumes of 4.930 to 5.120 million (consensus 5.050) vs the 5.040 million reported.

Unadjusted Year-over-Year Change in Existing Home Sales Volumes (blue line) - 3 Month Rolling Average (red line)

z existing1.PNG

The graph below presents unadjusted home sales volumes.

Unadjusted Monthly Home Sales Volumes

z existing2.PNG

Here are the headline words from the NAR analysts:

Lawrence Yun, NAR chief economist, says sales picked up in December to close a 2014 that got off to a sluggish start but showed encouraging signs of activity the second half of the year. "Home sales improved over the summer once inventory increased, prices moderated and economic growth accelerated," he said. "Sales were measurably better in the second half - up 8 percent compared to the first six months of the year."

"A drop in housing supply in December raises some affordability concerns in the months ahead as minimal selection and the potential for faster price appreciation could offset the demand from buyers encouraged by a stronger economy and sub-4 percent interest rates," says Yun. "Housing costs - both rents and home prices - continue to outpace wages and are burdensome for potential buyers trying to save for a downpayment while looking for available homes in their price range."

NAR President Chris Polychron, says Realtors® are optimistic the Federal Housing Administration's plan to reduce annual mortgage insurance premiums will have a positive impact on first-time buyers once it goes into effect on January 26. "NAR is a strong supporter of the FHA and its vital role in the mortgage marketplace for homebuyers," he said. "Realtors® support responsible lending to qualified borrowers and the move to lower premiums will enable more buyers to enter the market while continuing to protect taxpayers from the risky lending practices that led to the housing crash."

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)

z existing3.PNG

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 home prices improved.

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)

z existing5.PNG

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 3.6% 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 December was $209,500, which is 6.0 percent above December 2013. This marks the 34th consecutive month of year-over-year price gains.

According to the NAR, all-cash sales accounted for 26% of sales this month.

The percent share of first-time buyers was 29 percent in December, down from 31 percent in November but up from a year ago (27 percent). First-time buyers in 2014 represented an average of 29 percent for the second straight year. A separate NAR survey released in late 2014 revealed that the annual share of first-time buyers fell to its lowest level in nearly three decades.

All-cash sales were 26 percent of transactions in December, up from 25 percent in November and 32 percent in December of last year. Individual investors, who account for many cash sales, purchased 17 percent of homes in December, up from last month (15 percent) but down from December 2013 (21 percent). Sixty-three percent of investors paid cash in December.

Inventories declined - but are higher than the levels one year ago.

Total housing inventory2 at the end of December dropped 11.1 percent to 1.85 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace - down from 5.1 months in November. Unsold inventory is now 0.5 percent lower than a year ago (1.86 million).

Unadjusted Total Housing Inventory

z existing4.png

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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