March Existing Home Sales: More Sizzle Than Substance

by: Dave Kranzler


1st quarter 2015 run rate flat vs. 1st quarter 2013.

First homebuyer still largely absent - vacation home sales drove March numbers.

Homesales still stagnating at a historically low level.

New homebuilder stocks dropped nearly 3% despite a .5% rally in the S&P 500.

The National Association of Realtors released its March home sales report Wednesday, April 22, with the headline, "Existing Home Sales Spike In March." As I will show, however, this is a misleading headline when put in the context of historical data. Based on analyzing all of the data contained in the report, it would appear that the fundamentals of the housing market continue to stagnate or deteriorate. Moreover, on a day when the S&P 500 jumped .5%, the Dow Jones Home Construction index dropped nearly 3%, which I believe reinforces my opinion on the substantive data underlying the headline data.

The headline existing home sales number for March showed a 6.1% increase over February and a 10.4% increase over March 2014. However, we need to put the comparison data in context. Recall that economic activity, especially home sales, in the first quarter of 2014 was said to be negatively affected by unusually harsh winter weather. This means that a year over year gain of 10% for March might be misleading.

To test this viewpoint, I looked at the average monthly sales for the first quarter of 2013 vs. the first quarter of 2015 (data from the NAR):

Comparing 2013 vs. 2015 like this eliminates any seasonal bias or weather bias. Including the fact that the quarterly average for Q1 2014 was lower than for 2013 and 2015, you can see that existing home sales over the 2013-2015 period have been basically flat. In other words, the National Association of Homebuilders headline is misleading when the March numbers are put into the context of a longer-term trend.

In addition to the fact that the longer-term trend shows flat existing home sales, the underlying component data (from the link at the top) showed a continued relative lack of participation from the first time buyer segment and a continued decline in the investor segment of the market. The first time buyer represented 30% of March home sales. Historically, over a long period of time, the first time buyer has represented 40-50% of all sales (source: NAR):

As you can see, the first time buyer as a percent of the existing home sales market has been steadily declining since 2009. The first time buyer is the most important fundamental buyer cohort because the move-up buyer typically has to sell its home before it can upgrade. The relative lack of buying from first time homebuyers, and therefore depressed buy/sell activity by move-up buyers, is the primary reason the housing market has not staged a bigger recovery since the housing bubble popped.

In fact, most of the increase in unit sales volume since the Fed started QE and dropped interest rates to near zero has come from the investor segment, both institutional and individual/flipper. In that regard, all-cash sales were 24% of the market in March, down from 26% in February and down from 33% in March 2014. Individual investors were 14% of sales in March, which was flat vs. February and down from 17% in March 2014. As this data shows, the investor component of sales volume continues to decline. I've detailed in previous articles that investor volume has been declining since early 2014.

The only reason that existing home sales, in my view, were not lower in March, or in all of the first quarter of 2015, was due to vacation home sales: U.S. Vacation Home Sales Set Record. In my opinion, the upper income demographic has benefited the most from QE and from the inexorable rise in the stock market. The median household income for vacation home buyers, according to that article linked, is $94,380. This is nearly double the median household income for the entire United States. More importantly, as I have argued in previous articles, vacation home buying is not sustainable at the current rate and, to be sure, is not the fundamental basis of a healthy housing market. I believe vacation home sales will soon fade, as has investor buying, and homes sales will begin to decline precipitously.

Finally, to revisit the idea of looking at the current rate of home sales in the context of longer-term historical data, the graph below shows the post-recession rebound in housing for the entire period since World War II vs. the negligible rebound in housing for the current period since 2009 (Source: Bureau of Economic Analysis, Zerohedge):

As you can see, the current "recovery" in the housing market has been a non-event compared to the entire 60-year period since WWII.

Interestingly, despite the bullish headlines, which announced Wednesday's existing home sales data, the homebuilder stocks (Dow Jones Home Construction Index) fell 2.7% even though the S&P 500 closed up .5% for the day. I believe this market reaction to the existing home sales data by the housing stock sector reinforces my analysis on the data. On this basis, I continue to recommend a sell/short-sell bias toward the homebuilders.

At some point, the underlying bearish home sales data will cause a rush for the exits by big investors. Because the homebuilder stocks have a high market beta, traders/speculators with short positions in homebuilder stocks have an opportunity for big gains when the institutions shift out of the sector. As an example, D.R. Horton (NYSE:DHI), which reported a top-line and bottom-line "beat" of expectations, dropped over 5% yesterday (Wednesday, April 22). I continue to like and hold short positions in DHI, KB Home (NYSE:KBH), and Ryland (NYSE:RYL). I also like shorts in Pulte (NYSE:PHM), Lennar (NYSE:LEN), Toll Brothers (NYSE:TOL) and Beazer (NYSE:BZH).

Disclosure: The author is short DHI, KBH, RYL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.