Existing Sales reported today fell for the first time in June MoM in many years. People are incorrectly blaming the surge in rates. I say “incorrectly” because, as detailed in the following note, today’s “June” Existing Sales are from purchase and pricing decisions in April and May (NAR counts the “sale” at closing) when rates were at record lows.
So, what’s going on???
Perhaps a market — due to the greatest stimulus of all time thrown at housing over the past 18 months in the form of historic low sub 3.5% rates — that did a fantastic job at filling all the pent-up demand and an even better job at pulling demand forward, which was in desperate need of a natural stimulus hangover. And at the very time it started taking a break it was slammed by the largest interest rate surge — the largest removal of a long-term stimulus program — in modern housing market history.
In the next few months everybody will learn just how dependent on stimulus ‘this’ housing market really was and how everybody was “fooled” by said stimulus yet again.
1) June Existing Sales are “closings” and a reflection of escrows opened in April and May, when rates were at record lows (and they were still down MoM for the first time in more years than I care to review). Of note, NAR will revise today’s release lower by 3% next month.
2) June Builder New Home Sales are “contracts” to buy written in June, when rates were surging.
Bottom Line: Today’s June Existing Sales report stems from purchase/pricing decisions in April and May on record low rates; and Wed’s June New Sales report stems purchase/pricing decisions made on June on surging rates.
They are both called “June” but few understand the reporting methodology differences that will lead to a much larger miss when Wed’s New Home Sales data are released (unless consensus is adjusted downward sharply over the next two days). The lag effect of Existing Sales reporting will begin to reflect the “surge” in the July and August Existing Sales reports out in Aug and Sept. This is when reality comes to town.
On today’s Existing Sales report, I will have the break down and charts out shortly. On a cursory review I already see compelling evidence that the existing and new home sales were weakening before the “surge”. This tells me that there were fewer fence sitters that jumped in “as a result of” the rate surge than those first-timers, repeats, and investors who got blown out or decided to wait “due to” the rate surge. This will be more pronounced in the builder segment due to the lack of “investors”.
Why NAR “Inventory Levels” are a Red-Herring…Inventory is not “low“
There is a ton of chatter today over “NAR Listed Inventory” levels being so low. This is a red-herring. It’s lunacy…for the life of me, I can’t understand where people get these wild haired ideas in the “new-age” housing market. Come on…really??? 1 house for sale could be massive supply in a market of dead people.
Remember, one cannot compare today’s housing metrics with 7, 17, 27 or 57 years ago. That’s because today 50% of all mortgage’d homeowners — throughout history the most influential demand cohort — are LOCKED-IN due to negative equity, “effective” negative equity, a legacy HELOC not written off preventing them from getting a mortgage, and/or insufficient income/credit needed for a mortgage loan.
So, while inventory ‘shows’ as being the lowest in years. “Total Potential Demand” has also been cut in half!
Bottom Line on Inventory: Listed inventory is very low by “historical standards”. But who cares about inventory levels in a vacuum…this datapoint is meaningless without the demand metric. In short, you can’t just look at supply without looking at corresponding demand. And you can’t just look at demand here and now without “normalizing” total demand for present market conditions. And when doing so, you see the real picture.
So net-net, given Total Potential Demand has been gutted over the past 6 yars inventory is not low. It’s just about normal at between 5 and 6 months.
As such, the question becomes “how stable is today’s demand?”…
The incremental buyer and price pusher over the past 18 months — the cohort responsible for the lions’ share of the Twist-QE3 inspired housing market ‘short squeeze’ — was the buy and flip/rent investor regularly paying 10% to 20% over appraised value/purchase pricing using a cap-rate model as a guide. This is evidenced perfectly by the ongoing saga in builder New Home Sales (where “investors don’t roam), still down 60% from 2002 – 2007 levels while Existing Sales (where “investors” snapped up property for buy and flip/rent schemes) are down only about 30% from the same period.
There can’t be an inventory shortage…
Last, but not least, fundamentally speaking there cannot be an inventory shortage when Wall Street PE firms in the regions with the largest price gains and proclaimed “lowest inventory” levels are sitting on 50% rental vacancy rates and very volatile rental rates in their buy-and-rent scheme ‘trades’.
There is no shortage of houses “in which to live”, which is the most important metric. In Vegas for example there are 50k houses headed for the rental pool in the remainder of the year. To put this into context there are far less than 10k houses for sales in the entire region and less than half that of closed sales each month. Good luck with all those rentals.
What has occurred in an “inventory” misallocation to rentals by those controlling the supply caused by QE and institutional malinvestment. They all jumped on the housing “trade” at the same time and now are stuck holding the “bag”. Pretty soon I suspect there will be plenty of freshly rehabbed houses for sale from said “investors” that compete directly with builder product as rehabs “act like” new house inventory. This, as builders ramp up build project…here we go again.
The Big News in Today’s Existing Sales Report…
The big news in today’s Existing Home Sales report that nobody is talking about was that investors in April and May — when rates were at lows — fell sharply MoM and YoY…the worst performing cohort by far.
New-era “investors” and “distressed” are what drove the incremental sales volume and lions’ share of price gains over the past year. The first-timer and repeat buyer relying on cash down payments, mortgage loans, and things like “income levels” can’t chase prices 20% higher in 6 months.
This — and the rate “surge” in June not captured in todays’ report — bodes ill for the remainder of the year in house sales and even worse for prices.
Important Ideas on Macro Housing few understand…
1) Existing Home Sales are more important to the economy than New Housing: don’t let “economists” tell you that Existing Sales don’t matter to housing or the economy. That’s so old school thinking. In fact, they were never more important than in 2011 and 2012.
That’s because New Sales are only 7% of total US house sales, a record low; “distressed” rehabs for rent or flip — that required a ton of same labor and materials homebuilders use — made up so much of the market over the past 2 years; and 65% of Americans own an “existing” house and most don’t plan on buying from a builder. Heck, New Sales are so small relative to Existing that JUST THE BROKER COMMISSIONS GDP component on Existing Sales alone adds up to 60% of TOTAL monthly builder residential investment.
Bottom line: In total, when factoring in distressed rehabs that act like new home construction on the economy, 500k Existing Sales per month are 50% more beneficial to the economy in terms of dollars than 40k New Home Sales.
2) On house prices, the back half of the year is going to be very heavy. June Existing Sales do not reflect much of the weakness because, once again, they are from purchase and pricing decisions made in April and May when rates were at record lows.
However, beginning in July house prices — as reported by the more real-time reporting firms — will weaken monthly. The most widely-followed Case Shiller — due to it’s massively delayed reporting methodology of using the a 3 month average of existing sales — will not reflect the “surge” until the October data are released in December.
Case-Shiller will be hit especially hard. That’s because in the past year it was pushed much higher than it should have been due to distressed flip resales. In short, if I buy a beater for $200k, put in $50k in rehab and resell for $300k, Case Shiller treats it as a 50% price gain when in fact, HALF of that gain was in materials and labor. As distressed and flips have plunged so will this artificial boost in Case-Shiller. In fact, when the Case-Shiller distressed boost closes it will put incredible pressure on the indices.
3) Largest removal of direct housing market ever: It’s imperative to put the “surge” into the proper perspective. This wasn’t a run of the mill “rise” in mortgage rates we just underwent. In fact, this was the “overnight” removal of the greatest monetary accommodation aimed directly at housing, ever. Perhaps in the past when “rates rose” over much longer periods of time — and amidst wage inflation or other powerful and/or strengthening economic activity — one can’t find a direct correlation to house prices.
But when I look back only a few years at the last stimulus aimed right at housing — the Homebuyer Tax Credit — and what occurred when that ended, the correction is as plain as day.
Bottom line: The sudden loss in June of mostly all of the Twist/QE3 direct interest rate stimulus over the past 18 months was greater than the loss of the $8k Homebuyer Tax Credit to the power of 10.