Was July's Home Sales Lull a Blip or a Warning?

Posted by jbrumley on August 24, 2017 4:15 PM

In question is the why. Not in question is the what. Sales of homes, new or existing, slumped last month, leaving consumers and investors wondering if it's all part of a bigger headwind. After all, we also learned a week earlier that July's housing starts and issued building permits were down from June's levels, rekindling a period of tepid readings.

Last month, sales of existing homes fell from an annualized pace of 5.51 million to 5.44 million, falling short of the 5.5 million pace analysts had modeled. For the same month, new home sales of 571,000 came up short of the 615,000 unit pace, down from June's reading of 630,000 units.

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Some headlines claimed it was a lack of inventory that kept sales stifled, though the data doesn't suggest that's the case. As of the end of last month, there was a 5.8 month supply of new houses... the highest level since September of 2015. Inventory of existing houses rolled in at 4.2 months worth of supply, which is low by long-term historical standards but not as low as it was near the end of last year -- more homes have been sold with less inventory available.

Were it just one rough month, it might be dismissible. July's poor readings somewhat underscore, however, a few months worth of slowing data.

A handful of headlines partially clarified the broad idea adopted by some, suggesting it was a lack of lower-priced homes for sale that put the kibosh on purchases. There's some empirical evidence to that end as well. Namely, last month, 33% of home purchases came from first-time homeowners, versus a historical norm of 40%. Also pointing to the notion that starter homes aren't readily available and affordable is the fact that the median price for a new home last month was 6.3% higher than the median price from this time last year.

Still, June's portion of sales from first-time buyers was 32%, and June's activity was relatively strong.

The matter does force a "chicken or egg" question, meaning are homes not being bought because new ones aren't being built, or are they not being built because demand for them is weak? Could it be a little of both?

Whatever the case is, we do know that starts and permits (as noted above) have been lackluster of late. They've not been bad, but not good either.

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Generally speaking, one is inclined to think builders have a firm grip on the true pulse of the home market, and the new home market in particular. If they're not building, it's because they know a slowdown is looming, if not here. In other words,  a lack of demand is the reason purchases are low and starts and permits are weak. Yet, homebuilder confidence soared earlier this month, reaching the highest level seen since May. Indeed, the current reading of 68.0 is within reach of multi-year highs, and at the point of a long-term, well-supported uptrend. Clearly builders aren't concerned about some of the other recent activity data.

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Our best guess is, July's was an oddity. Though the pace of the housing market's improvement may be slowing, progress is still progress. Much of the recent turbulence can be attributed to political turmoil and comparisons that don't mean much. Broad bullishness on housing is still merited... though do keep an eye on inventory levels in future activity reports. They'll indicate the true health of what's happening here.

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