As I expected, Existing Home Sales (EHS) crashed below expectations in May. According to the National Association of Realtors, they fell 9.7% compared with April, to a seasonally adjusted annualized rate of 3.91 million units (lowest since October 2010). Compared with a year ago, purchases were down 26.6%, the biggest annual slide since February 2008.
The decline was even larger without seasonal adjustment reaching 31.4% YoY (largest fall since December 2007). The drop was amplified by calendar effects, namely fewer business days in May 2020 (compared to May 2019).
This collapse can be explained by other transitory factors that will partly normalize as soon as June. First of all, according to the Census Bureau, “the majority of transactions are reported when the sales contract is closed. Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore, an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.” In other words, most buyers placed their offers in April (and to a lesser extent in March), during the height of stay-at-home orders. Next report (June) will therefore reflect a part of activity normalization (reopening), which should result in a bounce.
Furthermore, it’s also worth noting that sales have been depleted by the lack of supply, which limited choices for buyers. Looking at the three-month moving average, EHS inventory fell 16.8% YoY in May (largest decline since April 2013). Although this pattern has started in late 2019, it was amplified over the last three months reflecting owners’ inability to put homes on the market amid restrictions. This trend should partly reverse in the coming months supporting sales’ rebound.
In the meantime, fundamentals also improved with a drop of mortgage rates. Last week, the average for a 30-year fixed-rate loan was 3.13%, down from 3.21% last week and a low point in almost 50 years of data-keeping by Freddie Mac. The previous record was 3.15%, reached late last month.
The avg. 30-Yr FRM drops down to 3.13% https://t.co/Cj2GH9Tofy
Chief Economist @TheSamKhater: “While the rebound in the economy is uneven, the housing market is exhibiting strength. Mortgage rates have hit another record low putting many homebuyers in the buying mood.” pic.twitter.com/S4JrpAefsn
— Freddie Mac (@FreddieMac) June 18, 2020
In this context, local/state data already showed that pending home sales (PHS), a leading indicator for EHS, are on track to rebound in May. This rebound would be coherent with mortgage purchase applications which “increased to the highest level in over 11 years and for the ninth consecutive week.”
MBA’s Joel Kan: “Purchase applications increased to the highest level in over 11 years and for the ninth consecutive week.” pic.twitter.com/vTm5LkrwnQ
— Mortgage Bankers Association (@MBAMortgage) June 17, 2020
To summarize, it seems that EHS reflected worst of the crisis impact in May and will rebound mechanically in June. This scenario should be reinforced by a likely jump of PHS in May (figures will be released on June 29).