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Housing Continues to Offer Mixed Signals

Existing Home Sales v Months

The National Association of Realtors released data on Existing Home Sales this morning which showed existing home sales declining 2.7% from July to a (SAAR) rate of 5,100,000 dwellings per year. The one year chart of existing home sales (blue line) above shows that we've spent the latter half of the past 12 months witnessing a rise in sales of existing homes. In fact, August's decrease was the first decline in activity since the March numbers were released; ironically, March also marked a low for US equity markets.

If you're looking for the silver lining, the number of months worth of housing inventory on the market is down 19.8% year over year. At 8.5 months of available housing inventory, we are still above the 6 month level which normally constitutes a "healthy" housing market. However, the inventory trend is headed in the right direction.

The risk I see going forward is that a) existing home sales moderate, or stagnate, around their current levels, and b) new housing starts continue to rise, possibly as a function of stimulus funds making their way into the economy. The government has already displayed a willingness to use stimulus funds to revive construction of politically advantageous housing projects; this sort of activity may be beneficial in the short term from a pure employment perspective, but it ultimately exacerbates the single largest fundamental drag on the US economy, i.e the anemic housing market. Housing starts and existing sales either need to both be trending positive, or starts need to be falling while sales are rising. The August trend - rising starts and falling sales - is a recipe for a continuation of housing's woes. Obviously, there is no use in over-analyzing each new data point; I'm merely pointing out the disadvantages the market faces if the current month's trend were to continue.

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