HOW SHOCKING WAS THE HOMES SALES DECLINE?

The analyst community was shocked by Thursday’s decline in existing homes sales.  The WSJ summarizes the thoughts from all over the street:

• We have harped on the fact that the coming expiration of the first-time homebuyer tax credit would likely result in some weakening in sales, as the credit had likely pulled a portion of existing home sales forward into the summer months. While we still hold to that idea, it is not clear if the August drop reflects that dynamic or simply a modest pullback following the largest percentage gain in resales since at least 1999. Regardless, sales are likely to soften somewhat further in the near future. In order to claim the tax credit, a buyer must close on a home by November 30. With the process currently taking about 60 days, according to the NAR, a buyer must purchase the home by late September in order to ensure that the paperwork is completed in time. Since resales are reported at contract closing, however, these data may continue to show an impact from the credit up to the expiration. Presumably, beginning late in the year (assuming the credit is not extended), there will be a pullback in resales, as the stimulus ends. –Omair Sharif, RBS
• Historically high levels of affordability and the stimulus provided by the first time homebuyer tax credit have helped to trigger a rebound in resales over the course of recent months. However, depressed consumer confidence and an elevated unemployment rate continue to represent major headwinds. On balance, we expect to see a modest underlying recovery in sales continue to play out in the months ahead — the strength of that recovery will depend, in part, on legislative action. A number of proposals have been floated to extend — and possibly to expand — the current homebuyer credit that expires on Dec 1. Over the course of the past week or so, the momentum appears to have shifted in favor of passage of some sort of legislation along these lines. But, nothing is assured at this point and it will be very interesting to see how this plays out. –David Greenlaw, Morgan Stanley
• One step forward, 2.7 steps back: after several months of consistent improvement, existing home sales declined by 2.7% for the month of August, in a surprising break from a slate of positive housing market news. What’s behind the back slide? Hard to say, but the dramatic uptick in activity for July may have helped to eliminate a large portion of the “priced to move” housing inventory from the market. In the next two months we anticipate seeing an artificial rise in sales as potential buyers look to take advantage of the expiring home purchase tax incentives. –Guy LeBas, Janney Montgomery Scott
• As in the preceding ten months, the National Association of Realtors, who compile these data, estimated that a large (albeit generally diminishing) portion of the sales that occurred in the month were foreclosure-linked or otherwise distressed (estimated 31% in August, identical to the July share). Part of the market clearing process is that distressed properties must be sold, so the fact that this is occurring is good. Still, it certainly depresses prices, and there are plenty more foreclosed (or soon to be foreclosed) homes in the pipeline. It is likely, therefore, that median sales prices will continue to decline for the foreseeable future. –Joshua Shapiro, MFR Inc.
• The setback reported is not terribly surprising given the large (+7.2%) increase reported for July and the strong advance in such sales that has occurred over the past half year. At the annual rate of 5.1 million reported for August, sales are still up 13.6% from the low reached in January and about 3-1/2% above year-earlier levels. Despite the drop reported for sales, the inventory/sales ratio fell to 8.5 months supply from 9.3 months in July. On the surface, this appears to be a promising development. However, the inventory data are not adjusted for seasonal variation and reductions could also simply reflect decisions to pull homes off the market by those who are still living in them rather than a reduction in the vast supply of unoccupied homes. –Goldman Sachs
• Since 1973, sales have risen for five or more consecutive months just 13 times. As with most other economic indicators, home sales move in fits and starts and this decline does not alter our judgment that sales have turned the corner towards growth though the pattern is likely to be uneven. Indeed, even after the small drop in August, single family home sales are up 10.6% from the January low, the best growth over any 7-month stretch since June 2004. Though modestly disappointing, the sales drop in August does not alter the outlook. –Nomura Global Economics
• This is an unpleasant surprise. The pending sales index, which has been a decent guide to actual sales in recent months, pointed to sales rising to 5.4M or even higher. The gap between the two numbers is not unprecedentedly large but we had hoped for better. The NAR says closings are being delayed by low appraisals and slow mortgage underwriting but these are hardly new stories so they likely don’t explain the sudden sales dip. Could just be noise; we await the next pending sales index with some trepidation. –Ian Shepherdson, High Frequency Economics
• The August numbers were surprisingly weak, given that latest Pending Home Sales reading and the shot in the arm from the tax credit for first-time homebuyers. The National Association of Realtor’s suggested that the recent surge in sales may have led to temporary gridlock. We cannot come up with a better explanation. Housing statistics are noisy, so a one-month setback is not worrisome. –Patrick Newport, IHS Global Insight

Source: WSJ