May 2014 Existing Home Sales Remain Frigid

Written by Steven Hansen

The headlines for existing home sales say that sales are “heating up” – but are still declining year-over-year. Our analysis cannot find the “heating up” – with sales continuing bad. The three month rolling averages are continuing to decline.

Econintersect Analysis:

• Sales growth decelerated 1.1% month-over-month, down 8.2% year-over-year – sales growth rate trend is decelerating using the 3 month moving average.
• Prices growth accelerated 0.1% month-over-month, Up 3.8% year-over-year – price growth rate trend is decelerating using the 3 month moving average.
• The homes for sale inventory grew this month, but is historically low for Mays (but higher than inventory levels one year ago).

NAR reported:

• Sales up 4.9% month-over-month, down 5.0% year-over-year.
• Prices up 5.1% year-over-year
• The market expected annualized sales volumes of 4.68 to 4.80 million (consensus 4.75) vs the 4.89 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)

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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 current sales activity is rebounding after the lackluster first quarter. “Home buyers are benefiting from slower price growth due to the much-needed, rising inventory levels seen since the beginning of the year,” he said. “Moreover, sales were helped by the improving job market and the temporary but slight decline in mortgage rates.”

NAR President Steve Brown said housing fundamentals are showing slight improvement in markets across the country. “Many potential buyers were left on the sidelines beginning last summer as affordability declined amidst rising home prices and interest rates,” he said. “The temporary pause in rising interest rates and more homes for sale is good news – especially for first-time home buyers – who likely have a better chance in upcoming months to make a competitive offer that’s in return accepted by the seller.”

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 general decline in home price rate of growth.

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)

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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 4.2% 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 price3 for all housing types in May was $213,400, which is 5.1 percent above May 2013. “Rising inventory bodes well for slower price growth and greater affordability, but the amount of homes for sale is still modestly below a balanced market. Therefore, new home construction is still needed to keep prices and housing supply healthy in the long run,” Yun added.

According to the NAR, all-cash sales accounted for 32% of sales this month.

The percent share of first-time buyers continued to underperform, representing less than one- third of all buyers at 27 percent in May, down from 29 percent in April; they were 29 percent in April 2013.

All-cash sales comprised 32 percent of transactions in May, unchanged from last month and down from 33 percent in May 2013. Individual investors, who account for many cash sales, purchased 16 percent of homes in May, down from 18 percent in April; they were 18 percent in May 2013. Sixty-eight percent of investors paid cash in May.

Inventories improved – and are higher than the levels one year ago.

Total housing inventory at the end of May climbed 2.2 percent to 2.28 million existing homes available for sale, which represents a 5.6-month supply at the current sales pace, down slightly from 5.7 months in April. Unsold inventory is 6.0 percent higher than a year ago, when there were 2.15 million existing homes available for sale.

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, 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).