July 2013 Existing Home Sales “Spiked”

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The headlines for existing home sales say that sales growth “spiked” in July month-over-month. Our analysis shows sales were very strong, and this month’s data is so strong that it may be signalling a spurt in the rate-of-growth trends.

Econintersect Analysis:

  • Sales growth accelerated 12.7% month-over-month, Up 20.7% year-over-year – sales growth rate trend is accelerating using the 3 month moving average.
  • Prices growth accelerated 0.5% month-over-month, Up 10.1% year-over-year – price growth rate trend is accelerating using the 3 month moving average.
  • The homes for sale inventory grew again this month, but is historically low for Julys.

NAR reported:

  • Sales up 6.5% month-over-month, Up 17.2% year-over-year
  • Prices up 13.7% year-over-year
  • The market expected annualized sales volumes of 5.0 to 5.2 million (vs the 5.39 million reported)

Overall, this is the 25th month in a row of improving year-over-year home sales volumes (unadjusted data). Since mid 2011, home sales have been positively growing year-over-year. However, the strong rate of growth seen from mid-2010 to the beginning of 2012 appears to have flat-lined as shown on the graph below – until this July 2013. The data this month shows a penetration of the existing trend channel to the upside.  Is this the beginning of an increased rate of growth?

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

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The graph below presents unadjusted home sales volumes.

Unadjusted Monthly Home Sales Volumes

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Here are the headline words from the NAR analysts:

Lawrence Yun, NAR chief economist, said changes in affordability are impacting the market.  “Mortgage interest rates are at the highest level in two years, pushing some buyers off the sidelines,” he said.  “The initial rise in interest rates provided strong incentive for closing deals.  However, further rate increases will diminish the pool of eligible buyers.”

Despite higher mortgage interest rates, Yun identified compensating factors that can sustain a continued recovery.  “Although housing affordability conditions will become less attractive, jobs are being added to the economy, and mortgage underwriting standards should normalize over time from current stringent conditions as default rates fall.”

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)

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To remove the seasonality in home prices, here is a year-over-year graph which demonstrates a continuing strengthening in home prices.

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)

/images/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 an 9.7% year-over-year gain.

Even so, homes today are still affordable according to the NAR’s Housing Affordability Index – although this index appears to currently have some seasonality.

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 national median existing-home price3 for all housing types was $213,500 in July, which is 13.7 percent above July 2012.  This marks 17 consecutive months of year-over-year price increases, which last occurred from January 2005 to May 2006.

The median price has risen at double-digit rates for the past eight months, and is now 7.3 percent below the all-time record of $230,400 in July 2006.  Two years ago, the median price was 25.7 percent below the peak.

Distressed homes – foreclosures and short sales – accounted for 15 percent of July sales, the same as in June and matching the lowest share since monthly tracking began in October 2008; they were 24 percent in July 2012.  Continuing declines in the share of distressed sales account for some of the price gain.

According to the NAR, all-cash sales accounted for 31% of sales this month.

First-time buyers accounted for 29 percent of purchases in July, unchanged from June, but are down from 34 percent in July 2012.

All-cash sales comprised 31 percent of transactions in July, the same as in June; they were 27 percent in July 2012.  Individual investors, who account for many cash sales, purchased 16 percent of homes in July, down from 17 percent in June; they reached a cyclical peak of 22 percent in February of this year.

Inventories rose marginally.

Total housing inventory at the end of July rose 5.6 percent to 2.28 million existing homes available for sale, which represents a 5.1-month supply2 at the current sales pace, unchanged from June.  Listed inventory is 5.0 percent below a year ago, when there was a 6.3-month supply.

Unadjusted Total Housing Inventory

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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, Econintersect analysis 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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