Existing Home Sales rose 6.8% in March to a seasonally adjusted annual rate of 5.35 million. That rate is 16.1% higher than the 4.61 million rate of a year ago. The number was slightly better than the consensus expectations of a 5.29 million annual rate.
Existing homes sales are recorded at the time of closing, not when the contract is signed. Thus while there is some impact from the tax credit that expires for houses where the contract is signed after April 30, they still have until the end of June to close. Therefore, most of the surge due to the end of the tax credit will probably come in May and June.
In tomorrow’s New Home Sales data, the effect should be more pronounced for March, since new home sales are recorded when the contract is signed. As the first graph below (from http://www.calculatedriskblog.com/) shows, last fall there was a very big impact as the tax credit was about to expire and people rushed to get in under the wire. The credit was extended at the last minute and sales immediately dropped back to their previous low level. We will probably see another spike and drop later this spring, and today’s numbers might be the first signs of it — not of a real underlying increase in overall demand.
Both single-family homes (up 7.3%) and condos (up 3.1%) recorded increases for the month. On a year-over-year basis, both are up, but condo sales are doing much better (i.e., they were even more depressed a year ago) with a rise of 39.3%, versus a 13.3% increase for single-family homes. The median value of single-family homes ($170,700, up 0.6% year over year) is almost identical to that of condos ($170,600, down 0.7%), but single-family homes made up 7 of every 8 existing home sales in March.
Prices do seem to have stabilized. It will be very interesting to see if they remain stable after the tax credit goes away. Economic theory suggests that when a transaction is subsidized by a third party (in this case Uncle Sam), the benefits are shared between both the buyer and the seller. The seller’s portion would show up in a higher sales price, so some of the stabilization in home prices may be artificial.
Sales Numbers by Region
All four regions saw month-over-month increases in sales. The Midwest led the way with a 7.2% increase, followed by the South with a 7.1% increase. The West was up 6.6% and the Northeast lagged slightly with a 6.0% increase. However, on a year-over-year basis, the Northeast has shown the biggest improvement by a fairly wide margin, with an increase of 25.4%. The next best is the Midwest with a 15.5% increase, followed by the West with a 14.0% increase and the South — by far the biggest of the four regions — trailing with a 13.9% increase year over year.
The Northeast has also fared the best when it comes to prices, with a 8.9% year-over-year median increase, followed by a 5.5% increase in the South. Median prices were almost unchanged in the Midwest with a 0.2% rise, and out West median prices are down 7.9% year over year. Median prices are not the best metric of tracking the value of homes since they are subject to mix shifts. Repeat sales indexes like Case-Schiller are better measures, but are released with more than a two-month delay.
Stabilization a Welcome Sign
Even so, the stabilization of home prices is good news since, for the vast majority of Americans, the equity in their homes is their largest store of wealth. Also, as prices fall, more people are pushed underwater on their mortgages. When people are deeply underwater on their homes, it makes economic sense for them to stop paying the mortgage and wait for the bank to get around to foreclosing on them. It is possible to live rent/mortgage free for over a year nowadays by doing so.
The hit on your credit record and the disruption and social stigma of eventually being foreclosed on is not worth it if someone is just slightly underwater, but when the value of the mortgage exceeds the value of the home by more than 20% or so, people will walk away in droves. The social stigma of doing so has decreased significantly since the bubble popped. After all, big players like Donald Trump do it all the time on commercial properties, and he still gets to say “your fired” to other people on TV.
Inventories Rise on Seasonality
Inventories rose by 1.5%, which is seasonally normal, and we will probably see a further increase in inventories over the next few months. They are down 1.8% year over year, but inventories have been declining on a year-over-year basis for 20 months now, and this is the smallest year-over-year decline in a long time.
The second graph (also from www.calculatedrisk.com) shows the distinct seasonal pattern to existing home inventories, as well as the fact that we have made significant progress over the last two years in bringing down at least the official inventory (there is still a substantial shadow inventory of houses in some stage of the foreclosure process that will eventually come onto the market), but that inventories are still very high relative to where they were in the first half of the decade.
However, while inventories increased for the month, they did not increase as much as sales did, and as a result the months of supply fell to 8.0 from 8.5 months. During the bubble, the months of supply tended to fluctuate between 4 and 5 months, which is too low and indicates an overheated market. During the worst of the bust, the months of supply were between 10 and 11 months. Six months is probably a healthy level, so we are now about halfway between healthy and the awful levels of late 2008 and early 2009.
Temper Your Enthusiasm
While the somewhat higher than expected level of existing home sales is good news, as is the growth from both last month and last year, one should not get too excited about it. First, it is the result of some artificial stimulus in the form of the tax credit, although that effect will be bigger in the next two months than it was in March. The second and much more important reason is that existing home sales just are not that important to the economy.
What really matters is new home sales, which are due out tomorrow. Each new home built generates an enormous amount of economic activity, ranging from employing the people building the house, to more sales for lumber companies like Plum Creek Timber (PCL) to wallboard firms like USG (USG) to plumbing and cabinet makers like Fortune Brands (FO), and, of course, the homebuilders themselves like D.R. Horton (DHI).
In contrast, existing home sales tend to help used home dealers (aka realtors) and perhaps sales of paint at Sherwin Williams (SHW) as people redecorate. Thus prices of used homes, and the level of inventory which points to the direction that prices are likely to go in the future, are much more important than the level of existing home sales activity.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
