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Must-know trends: June 2014's building starts, sales, and permits

Part 3
Must-know trends: June 2014's building starts, sales, and permits (Part 3 of 4)

Must-know: Why existing home sales rose in June to 5.04 million

Existing home sales increase to a 5.04 million pace in June

The National Association of Realtors (or NAR) reports existing home sales once a month. The seasonally adjusted number reports completed transactions in single-family homes, condominiums, townhomes, and co-ops. The report includes such data points as existing home sales, inventory of houses for sale, median house price, mortgage rates, and median time on the market. Existing home sales were an annualized 5.04 million in June.

Existing Home SalesEnlarge Graph

Restricted supply has been the theme of the U.S. housing market over the past year

At the end of June, there were 2.3 million existing homes for sale, representing a 5.5-month supply. This is higher than the 2.16 million homes for sale last year. A level of six to 6.5 months means a balanced market. So, while inventory is building, we’re still at tight levels.

As professional investors have become major players in the real estate market, we’re seeing bidding wars for properties in the hardest-hit markets, like Phoenix, and even strong markets, like Washington, DC. For all the fears that a flood of properties would hit the market and drive down prices, the opposite problem has happened. That said, NAR forecasts that the jump in rates will begin to affect affordability in high-cost areas like California and the New York City metropolitan area.

Prices continue to rise

The median sale price for an existing home was $223,300, which is up 4.3% year-over-year. There’s definitely more demand than supply in the market. Some hot markets, like San Francisco and Phoenix, are experiencing the bidding wars we used to see in 2006. This increase in median home prices is somewhat overstated. Most of the transactions are concentrated in a few areas. Nationwide, we’re not seeing such large increases in prices.

Homebuilder earnings were generally strong

Second quarter earnings for the builders are beginning. Last quarter, the builders with more exposure to the first-time homebuyer, like KB Home (KBH), PulteGroup (PHM), and D.R. Horton (DHI), noted decreases in traffic as buyers became more price-conscious. We’ll hear soon from the the builders with November fiscal years like KB Home and Lennar (LEN).

Investors who want exposure to the entire homebuilding sector should look at the S&P SPDR Homebuilder ETF (XHB).

First-time homebuyers accounted for 28% of all sales—well below their historical level of 40%, up from 27% in April. The first-time homebuyer has been absent due to tough credit conditions, heavy student loan debt, and a difficult labor market. As those circumstances change, a lot of pent-up demand will release. This trend should drive homebuilder earnings for quite some time. Also, restricted supply has been a major feature of the current housing market. That phenomenon appears to be changing. If there’s a shortage of existing properties for sale, buyers will naturally turn to new construction.

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