Existing Home Sales Rise In February, Homebuilders Gain

Sales of previously owned homes increased in February 2018, despite low inventory and higher prices. The data came in as a breather after the last two month disappointed in terms of existing home sales.

Exchange traded funds or ETFs that track the homebuilding industry gained on Wednesday, after the news release. iShares U.S. Home Construction ETF ITB gained 1.6% while the SPDR S&P Homebuilders ETF XHB was up 1.07%.

Shares of prominent homebuilders such as D.R. Horton, Inc. DHI, Lennar Corporation LEN, Toll Brothers Inc. TOL, KB Home KBH and PulteGroup, Inc. PHM escalated yesterday after the release.

February Existing Home Sales Data

As revealed by the National Association of Realtors (NAR), existing-home sales, which account for about 90% of U.S. home sales, increased 3% in February to a seasonally adjusted annual rate of 5.54 million units from 5.38 million in January. It came in above the consensus estimate of 5.42 million. The same fell by 3.2% and 3.6% in January 2018 and December 2017, respectively.

Also, sales were up 1.1% from the year-ago level, reversing the 4.8% year-over-year decline in January.

The data showed uneven sales across regions. Sales in Northeast and Midwest, which continued to reel under cold weather, were down 12.3% and 2.4%, respectively. Sales were up respectively 11.4% and 6.6% in West and South. March winter storms are expected to disrupt home sales in the Northeast in the coming months.

Also, February's median sales price grew 5.9% from the comparable period a year ago to $241,700, marking the 72nd straight month of year-over-year increase. The price rise has to some extent restricted first-time buyers to enter the market as they comprised 29% of sales in February, down from 31% a year ago. NAR's 2017 Profile of Home Buyers and Sellers – released in late 2017 – revealed that the annual share of first-time buyers was 34%.

Again, the supply shortage is palpable. Though the inventory of existing homes increased 4.6% from January it was down 8.1% from the year-ago period. This happens to be the 33rd straight month of year-over-year decline. At the current pace , it will take only 3.4 months to deplete the current supply of homes in the market, according to NAR.

Housing Market Constraints

The U.S. housing industry is gradually recovering from muted sales that stemmed from a severe winter. But interest rate hikes, growing labor shortage, higher material costs and a constrained mortgage environment are restricting homebuilders to respond to this growing demand. The levy of tariff on steel, one of the major raw materials in the home building industry, is another headwind.  Also, caps on the deduction for mortgage interest following a recent overhaul of the tax code is likely to slow demand this year.

Increase in borrowing cost due to higher mortgage rate is yet another dampener. According to data released on the same day, from the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending March 16, 2018, mortgage applications decreased 1.1% from a week earlier, compared with an increase of 0.9% in the week before that. The Refinance Index decreased 5% from the previous week. The average fixed 30-year mortgage rate, however, edged down by 1 bps to 4.68%.

Strong Economic Growth a Bright Spot

Yesterday, the Federal benchmark rates were hiked by 0.25%. Also, the central bank gave indications of two more hikes this year. This increase in benchmark rates should further increase the borrowing cost thereby putting pressure on sales. Despite the odds facing the industry, the sector is expected to keep up a good show in the upcoming period, led by a steady rise in wages and a record low unemployment rate.

Moreover, a strong economic growth outlook for 2018 and 2019 from the policy makers keeps the optimism surrounding the housing market intact.  The Fed forecasts that unemployment this year will fall to 3.8% from the current rate of 4.1%. That would be the lowest jobless rate since April 2000. Unemployment is projected to fall even further in 2019 to 3.6% which would be the lowest rate since 1969.

Spring Effect

The housing sector should buoy on the spring selling season (a peak time for home sellers) which is already on. Normally, the season starts in March and lasts through May-June thanks to warmer weather after a chilly winter and buyers' tendency to move into a new house before the next school calendar starts. The season has traditionally favored the sector.

All eyes are now on new home sales data, to be released on Friday, which economists expect will show a gain. This is particularly so as sales of new U.S. single-family homes had dropped for the second straight month in January and in four of the past six months.

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