By Rom Badilla, CFA
The housing recovery is gathering strength as another data release shows further gains. The National Association of Realtors reported that Pending Sales of Previously Owned Homes rebounded in July. The Pending Sales of Previously Owned Homes Index, which gathers information from houses under contract as reported by multiple listing services and large real estate brokers, surged 2.4% last month. This increase, which surpassed expectations of a 1.0% gain, follows a June decline of 1.4%. July's number brings the year-over-year growth to 15.0% for this index on a seasonally-adjusted basis.
This July spike marks the highest gain since April of 2010 when tax incentives for first-time home buyers were about to expire. Given this high water mark is without any Federal assistance or credit, the recent data coupled with yesterday's report suggests that growth is organic, which in turn can build momentum for the housing sector and the rest of the economy.
Beyond the composite, higher sales of previously owned homes were fairly broad based across the U.S. The Midwest region and the South increased 3.4% and 5.4%, respectively in July following declines in the prior month. The Northeast rebounded by gaining 0.5% after a massive drop of 7.6% in June. Unfortunately, the increase was not uniform across the country as the West region reported a decline of 1.7%, which eats into part of the 2.9% gain in June.
The Pending Home Sales is an indicator of future housing activity, in particular Existing Home Sales, which is reported in mid-September. Momentum for the housing market typically results in even greater momentum for the economy. When assets that include financial assets and housing are growing, people are generally secure and optimistic about their financial well-being. This in turn, leads to a greater propensity to spend. Higher spending should lead to greater overall growth since the consumer encompasses about 70% of the economy.
Obviously, an improving economy should bode well for stocks as well as risk assets. Given this, the Federal Reserve is less likely to signal further economic stimulus this Friday with the Jackson Hole speech or at their mid-September FOMC meeting. A hawkish tone could send ripples to the market as disappointment could send bond yields higher.
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