Real Estate Forward Indicator - Better Days Ahead For Builders?

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Includes: ITB, IYR, LEN, NVR, TPH, VNQ, XHB
by: Markos Kaminis

Summary

A recently published forward indicator for housing offered an important change in trend for the better.

Contract signings for existing home sales rose slightly in June.

Inventory of existing homes for sale improved on a yearly basis for the first time in three years.

Finally, the factors weighing for the housing market may be strengthening enough to outweigh those keeping it in a stagnated state recently.

As more homeowners gain the financial ability and confidence to make a move, new home sales may benefit.

Sales of existing homes have been on the decline for five of the last six months. So, when the latest forward look into such sales came through Pending Home Sales data this week, it was well-noted. The data showed a slight month-to-month improvement which might still be significant for the overall housing market. Home prices and personal wealth stability should eventually allow homeowners to consider a move. Many of these new sellers of existing homes will be looking at new home purchases, which is good news for builders.

Pending Home Sales for June 2018

The Pending Home Sales Index, which marks contract signings for existing home sales, improved by 0.9% in June, to 106.9. The data contrasted against a slight decrease in existing home sale closings in June. The changes are so slight in the used home market, though, that we should be careful not to exaggerate the findings. What we have is a stagnant market due to tight housing inventory demand, but perhaps some underpinnings of homeownership are improving enough now to allow a breakthrough.

The year-over-year comparison highlights ongoing weakness, as June marked a 2.5% decrease against the prior year figure. Lawrence Yun, the chief economist of the National Association of Realtors, spelled out the problem clearly this month. Several factors are in play, working both for and against real estate activity. On the one hand, economic expansion, business growth and strong employment are working for homeownership. On the other hand, rising home prices and creeping mortgage rates are raising the bar of affordability for buyers.

Real Estate Inventory & Listings Turn the Corner

One important change may be in play for the better, and perhaps it's enough to swing housing out of stagnation. Besides the fact that existing home inventory improved on a yearly basis in June for the first time in three years, fresh data from Realtor.com showed significant upticks in real estate listings within many major metro markets. Those markets are obviously important employment centers. What I believe is implied here is that, finally, employed Americans are building enough wealth and confidence to make a move on more permanent housing.

A Slower Pace of Home Price Rise is a Good Thing

As more homes come to the market they are being immediately met by excess demand, so prices are still swiftly rising. However, a more modest pace of home price increase is probable as existing and new home inventory grows. That would be a good thing, because it would better allow buyers on the fringe of mortgage qualification to participate. And don't forget that buyers on the fringe also have the benefit of employment, increasing wealth stores and improving credit reports supporting them.

Increasing Existing Home Listings Supports the New Housing Market

As owners of existing homes increasingly put them up for sale, it should support the new home market. Many of these sellers of used homes will look to the new home market for their next home.

Relative Shares

YTD Performance

iShares US Real Estate (NYSE: IYR)

+1.3%

Vanguard Real Estate (NYSE: VNQ)

+0.02%

SPDR S&P Homebuilders (NYSE: XHB)

-10.3%

iShares US Home Construction (NYSE: ITB)

-12.5%

Lennar (NYSE: LEN)

-18%

NVR (NYSE: NVR)

-22%

TRI Pointe Group (NYSE: TPH)

-20%

Housing relative shares have been hammered in the year-to-date period against the SPDR S&P 500 (NYSE: SPY) performance of +2.5%.

Conclusion

It's my view that the factors at play for housing will soon outweigh those against it. Many stock market bears are looking for recession or the end of this secular bull market too early. I believe the economic expansion is finally normalized after a long and lagging recovery post the financial crisis and Great Recession. I see the next year and a half to two years marking boom period and giving cyclical shares like these in housing a lift higher. Of course, if the Administration miscalculates with its trade policy and its expectations for our trading partners, then the economic benefits of the new tax reform legislation could be nullified. In this case, the economic expansion could be cut short, but this is not the scenario I'm currently giving greatest weight to. For my regular work on the markets, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.