E — Economics

Preview: U.S. Existing Home Sales For October Will Beat Expectations

18 November, 2020




 

On Thursday, the National Association of Realtors (NAR) will release the Existing Home Sales (EHS) for October. According to the Bloomberg consensus, EHS should decrease by 1.1% MoM to 6.47M SAAR.

→ My proxies confirm that EHS will beat expectations* and will keep rising in October (probably reaching the highest level since April 2006).

  • Buyers continued to benefit from favorable market conditions in October with mortgage rates still close to the lowest level on record
  • Local/state reports confirm that sales kept rising by more than 20% YoY (non-seasonally adjusted: NSA) in October, which should translate into a bounce on a MoM basis (seasonally adjusted: SA)
  • It would be coherent with the trend in Pending Home Sales (PHS)
  • Recent announcements from corporates suggest that home-improvement activity (correlated to existing home sales) is still booming

→ Local/state data and different reports also point to a jump (YoY) of median home sales price amid an ongoing decline in inventory.

 

 

1. Buyers continued to benefit from favorable market conditions

Fundamentals remained very supportive with mortgage rates still near record low. According to Freddie Mac, last week mortgages rates were “about a percentage point below a year ago and continue to support purchase and refinance demand.”

 

 

2. Local/state reports confirm that sales kept rising by more than 20% YoY in October

Local/state figures suggest that national existing home sales (non-seasonally adjusted: NSA) are likely to have risen again on a YoY basis in October (fourth straight rise). The pace of increase (NSA) would probably exceed 20% YoY despite lower business day count this October. In addition, there is evidence that many households kept relocating due to coronavirus pandemic with some of them prefering suburbs due to demand for spacious homes. Using my sample of local/state data and a seasonal adjustment factor lower than last year (more favorable), I expect October EHS to largely beat the consensus of -1.1% MoM (seasonally adjusted: SA).

 

3. Another increase in Existing Home Sales would be coherent with the trend in Pending Home Sales

As the National Association of Realtors (NAR) noted, “The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.” Therefore, It would be coherent if EHS catch up with PHS as suggested by the chart below.

 

 

4. Recent announcements from corporates suggest that home-improvement activity is still booming

Two companies specialized in home-improvement published their quarterly results this week, which showed that sales grew at a strong rate compared to last year. I follow closely their statements given that, usually, home-improvement activity is closely correlated with existing home sales:

On Tuesday, Home Depot, the world’s largest home improvement retailer, reported “sales of $33.5 billion for the third quarter of fiscal 2020, an increase of $6.3 billion, or 23.2 percent from the third quarter of fiscal 2019. Comparable sales for the third quarter of fiscal 2020 were positive 24.1 percent, and comparable sales in the U.S. were positive 24.6 percent.”

On Wednesday, Lowe’s Companies, the home improvement retailer, reported “sales for the third quarter were $22.3 billion compared to $17.4 billion in the third quarter of 2019, and comparable sales increased 30.1 percent. Comparable sales for the U.S. home improvement business increased 30.4 percent for the third quarter.”

 

5. Median home sales price skyrocketed amid an ongoing decline in inventory

Local/state reports also pointed to a decline of single-family home inventory in October. As a result, the deficit of supply relative to demand supported prices for single-family home sales, which would result in another jump (YoY) for median price. As a reminder, the mix of home sales is skewed toward single family home sales, which mechanicaly boosts the median. This view perfectly fits with the latest Redfin report, which showed that “the median home sale price increased 15% year over year to $321,553, the highest on record.”

 

*I perfectly forecasted the level of EHS in July, August and September.