F — Forecasts

U.S. Existing Home Sales Will Disappoint Amid Weaker Demand

19 July, 2022
US New Home Sales

On Wednesday, the National Association of Realtors (NAR) will release the U.S. Existing Home Sales (EHS) for June. According to the Bloomberg consensus, EHS should decrease by 0.9% MoM to 5.36 million SAAR (v 5.41 million prior). My proxies suggest that EHS will surprise downward, reflecting weaker demand.

Summary

  • Local/regional data suggest that Existing Home Sales retraced sharply in June
  • Housing affordability collapsed, hitting demand
  • Inventory rebounded
  • Prices probably reached a top, leading to cancellations

1. Local/Regional Data Suggest That Existing Home Sales Retraced Sharply In June

According to my calculation, in order for the sales in adjusted value (after seasonal adjustment) to match the consensus (i.e. 5.36M), non-adjusted data would have to decrease by 10.4% YoY from June 2021 to June 2022. Local figures that I have gathered show a larger drop. Bill McBride also found similar results with sales expected to fall by 16.5% YoY. As a result, I expect housing transactions to decline more than expected on a MoM basis. It would be the fifth straight monthly contraction!

2. Housing Affordability Collapsed, Hitting Demand

Latest data from the NAR showed housing-affordability index fell to 102.5 in May, the lowest level since the index fell to 100.5 in July 2006. The key problem is that the typical monthly mortgage payment rose to $1,842 in May (up 51% YoY), assuming a 30-year fixed-rate mortgage and a 20% down payment. As a result, some buyers (especially first-time buyers) can no longer qualify for mortgages. In the meantime, elevated prices (in an environment of recession) are pushing other buyers to wait for a correction.

3. Inventory Rebounded

One of the recent development related to the housing market has been the rebound in inventory. According to Redfin, “The number of homes for sale nationwide in June rose 2%. That’s the first annual increase since July 2019, before the pandemic-fueled homebuying frenzy sapped the market of available homes and sent buyers into bidding wars for nearly every listing.” The move have gained traction recently with Altos pointing to a spike of 30.3% YoY in mid-July.

4. Prices Probably Reached A Top, Leading To Cancellations

As demand started weakening, a jump in inventory is likely to push prices down in the coming months. Therefore, several housing data providers reported that home-sale cancellations spiked in June with several buyers expecting a price inflexion point. As a matter of fact, Redfin noted that in June “Across the country, nearly 60,000 home sales fell through. That was equal to 15% of transactions that went into contract that month, the highest share of cancellations since April 2020, when early Covid lockdowns froze the housing market.” In addition, Danielle Hale, chief economist at Realtor.com highlighted that “Roughly 1 in 7 homes in June had a price reduction, up from roughly 1 in 13 in June 2021”.