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Why Did Existing Home Sales Rise in May?

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Why Did Existing Home Sales Rise in May? PART 1 OF 1

Why Did Existing Home Sales Rise in May?

Existing home sales increased

Once a month, the NAR (National Association of Realtors) reports existing home sales figures. The seasonally adjusted numbers relate to completed transactions in single-family homes, condominiums, townhouses, and co-ops.

Why Did Existing Home Sales Rise in May?

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The report includes data points such as existing home sales, inventory of houses for sale, median house prices, mortgage rates, and median times on the market. In April 2016, existing home sales reached an annualized 5.55 million. In March, existing home sales were revised downward to 5.45 million. This means that on a YoY (year-over-year) basis, they have risen by 4.5%.

Restricted supply

At the end of May, there were 2.15 million existing homes for sale. This represents a 4.7-month supply. A level of six to 6.5 months means a balanced market. Days on the market fell to 32 days from 39 days in April and 40 last year. This is the shortest days on the market since the NAR started keeping track of this statistic.

First-time homebuyers accounted for 30% of sales in April—down 2% from last month and on a YoY basis. Builders such as PulteGroup (PHM) and D.R. Horton (DHI) are particularly exposed to first-time homebuyers.

Rising prices

The median sale price for an existing home in May reached nearly $239,700—up 4.7% YoY. Of course, income growth has been tough to come by. This is stretching the historical relationship between wages and home prices. The ratio of median home prices to the median income ratio is 4.2x. This is above the historical range of 3.2x–3.6x.

Spring selling season is in full swing

Second quarter earnings are just beginning. Lennar (LEN) and KB Home (KNH) kicked off the season with good numbers. PulteGroup (PHM) and D.R. Horton are up next. For the most part, builders reported declining gross margins. This means that buyers are getting more price conscious. Builders need to promote more to get buyers to step up.

Builders also started allocating resources to multifamily construction. This is especially true for Toll Brothers (TOL). It’s concentrating on luxury urban apartments.

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

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