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posted on 21 March 2016

February 2016 Existing Home Sales Slump. Below Expectations.

Written by Steven Hansen

The headlines for existing home sales say "the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential". Our analysis of the unadjusted data shows that home sales did decline, and the rolling averages improved. Sales price rate of growth moderated.

Econintersect Analysis:

  • Unadjusted sales rate of growth decelerated 1.0 % month-over-month, up 6.4% year-over-year - sales growth rate trend improved using the 3 month moving average.
  • Unadjusted price rate of growth decelerated 2.3 % month-over-month, up 2.5 % year-over-year - price growth rate trend declined using the 3 month moving average.
  • The homes for sale inventory marginally grew this month, but remains historically low for Februarys, and is down 1.1 % from inventory levels one year ago).

NAR reported:

  • Sales down 7.1 % month-over-month, up 2.2 % year-over-year.
  • Prices up 4.4 % year-over-year
  • The market expected annualized sales volumes of 5.200 to 5.550 million (consensus 5.305 million) vs the 5.08 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 existing sales disappointed in February and failed to keep pace with what had been a strong start to the year. "Sales took a considerable step back in most of the country last month, and especially in the Northeast and Midwest," he said. "The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February's lack of closings. However, the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers."

According to Yun, job growth continues to hum along at a robust pace, but there appears to be some uneasiness among households that the economy is losing some steam. This was evident in NAR's latest quarterly HOME survey - released earlier this month - which revealed that fewer respondents believe the economy is improving, and a smaller share of renters said that now is a good time to buy a home.

"The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers," says Yun.

"Investor sales have trended surprisingly higher in recent months after falling to as low as 12 percent of sales in August 2015," adds Yun. "Now that there are fewer distressed homes available, it appears there's been a shift towards investors purchasing lower-priced homes and turning them into rentals. Already facing affordability issues, this competition at the entry-level market only adds to the roadblocks slowing first-time buyers."

NAR President Tom Salomone says many Realtors® are saying instances of multiple bids and affordable homes going under contract quickly are common in their markets. "With low supply this spring buying season, it's easy for buyers to get discouraged when their offer is rejected in favor of a higher bid," he said. "That's why it's important for buyers to stay patient and work with a Realtor® to develop a negotiation strategy that ensures success without overstretching their budget."

Comparison of Home Price Indices - Case-Shiller 3 Month Average (blue line, left axis), CoreLogic (green line, left axis), NAR 3 month rolling 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 improvement in home price rate of growth since mid-2012.

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 does a more complete analysis of home prices with the Case-Shiller analysis. The graphs above on prices use a three month rolling average of the NAR data, and show a 4.4 % year-over-year gain.

Homes today are still relatively 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 February was $210,800, up 4.4 percent from February 2015 ($201,900). February's price increase marks the 48th consecutive month of year-over-year gains.

According to the NAR, all-cash sales accounted for 25 % of sales this month.

The share of first-time buyers fell to 30 percent in February (matching the lowest share since November 2015) from 32 percent in January, but is up from 29 percent a year ago. First-time buyers in all of 2015 represented an average of 30 percent.

All-cash sales were 25 percent of transactions in February, down from 26 percent both in January and a year ago. Individual investors, who account for many cash sales, purchased 18 percent of homes in February (17 percent in January), matching the highest share since April 2014. Sixty-four percent of investors paid cash in February.

Unadjusted Inventories are below the levels of one year ago.

Total housing inventory at the end of February increased 3.3 percent to 1.88 million existing homes available for sale, but is still 1.1 percent lower than a year ago (1.90 million). Unsold inventory is at a 4.4-month supply at the current sales pace, up from 4.0 months in January.

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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