Homes for the Holidays

By: Michael Ashton | Tue, Dec 22, 2015
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It is not usually a very productive endeavor to write an article on December 22nd. In the past, I have made it more or less a rule not to post anything after about the middle of the month, unless it was a greatest-hits repost series or something. However, today's Existing Home Sales number was striking enough that it is worth at least a brief comment.

November Existing Home Sales was reported at 4.76mm units (seasonally-adjusted annualized rate), which was considerably below expectations for a nearly-unchanged 5.35mm. The chart (Source: Bloomberg) below makes graphically clear the magnitude of this disappointment.

US Existing Home Sales Chart

Recently, sales of existing homes had been back to something like normal, around 5.5mm units at an annualized rate. The big selloff will cause consternation in some quarters. It wasn't the weather: November's weather was, if anything, warmer than usual and so one wouldn't have thought foot traffic and closings would have been slower. And it wasn't payback, like in 2010 when the collapse followed the tax-incentive-expiration-induced spike of 2009. We can't really even shrug it off as "December economic data;" I am always skeptical of economic figures from December and January because it's just a mess to seasonally adjust most of them - especially those related to employment and income. But this was a November figure.

It was just a really bad number.

The potential significance is this: so far, analysts pointing to weakness in economic data have had to be careful about drawing too-strong conclusions because a lot of the weakness was confined to the oil and gas extraction industries, and spots of weakness in traditional manufacturing where a higher dollar hurt. Housing, however, is wholly domestic. It doesn't depend on oil and gas extraction, and the strength of the dollar is irrelevant.

Housing data are also notoriously volatile, although that complaint is less true of Existing Home Sales than New Home Sales (which is a much smaller figure, and depends much more on what inventory of homes is being offered). I would simply ignore this figure if it was New Home Sales. It's harder to shrug off Existing.

I don't believe a collapse is coming, though. Despite the fact that I have just made several observations that tend to increase the significance of this number, keep in mind that unlike in 2005-2007, there is no apparent bubble in the inventory of existing homes (see chart, source Bloomberg - note it is not seasonally adjusted so there is a distinct annual pattern).

Existing Home Sales Chart

The National Association of Realtors blamed the drop on a new regulation affecting closing documents, which is leading to a longer time-to-close for sales. If that is true - keep in mind that the NAR produces the existing home sales figure, but also keep in mind that they have an incentive to downplay declines - then we should see Existing Home Sales rebound in the months ahead. But even if we do not, the fact that there is no bubble in inventory means that we should not necessarily expect the rate of increase of existing home sales prices (which has been running around 6.5%, as the chart below shows) to decelerate any time soon. And that, of course, helps to drive a big piece of the CPI.

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All in all, this is a disturbing number and one that bears watching. My intuition is that this is not a sign of broadening weakness in the US economy. While I expect such a broadening, I don't think we have seen it yet.

 


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
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Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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