Home Prices Weigh on Existing Home Sales

by Dan Burrows | October 21, 2013 2:14 pm

Home Prices Weigh on Existing Home Sales

Home prices are rising along with mortgage rates, and that’s putting a dent in existing home sales.

Home prices jumped 12.4%, according to the latest readings, thanks to an imbalance of supply and demand. That’s right: Sales are rising, but there aren’t enough houses from which to choose, which in turn pushed home prices up and existing home sales down.

Of course, home prices aren’t the only thing weighing on existing home sales. Financing is also playing its part. Mortgages became significantly more expensive over the summer, and those prices stuck. The national average interest rate on a 30-year fixed mortgage currently stands at 4.23%, according to Bankrate.com[1]. As recently as April, the national average stood at 3.47%.

Still, higher home prices were the main culprit in the latest disappointing data.

September existing home sales declined 1.9% on a seasonally adjusted basis to an annual rate of 5.29 million, the National Association of Realtors[2] said Monday. Economists polled by Bloomberg projected existing home sales to notch an annualized rate of 5.3 million last month.

Additionally, the August data on existing home sales was revised lower, to an annual rate of 5.39 million from 5.48 million (which would have been a six-year high). July’s existing home sales also came in at an 5.39 million annualized rate.

Home Prices: A Double-Digit Spike

A three-month period of essentially flat home sales is easy to understand when you look at what has happened to home prices.

During the past year, median home prices for existing homes rose 11.7% to $199,200. At the same time, inventory — or the length of time required to sell all the houses on the market — was unchanged at five months of supply.

The short-term trend will remain on track with further declines in existing homes sales ahead, the NAR said, as rising home prices caused “affordability” to fall to a five-year low.

Home prices should start to ease as more houses come onto the market. The supply of available homes rose 1.8% to 2.21 million compared with the year-ago period. That’s the first year-over-year increase in 30 months. Furthermore, the long-term trend in existing home sales remains healthy, despite sharply higher home prices and mortgage rates.

Indeed, existing home sales point to a healthy housing market for three years running. Have a look at this chart, courtesy of the St. Louis Federal Reserve Bank, below:

Home Prices Existing Homes Sales CHART Home Prices Weigh on Existing Home Sales[3]

Shares in stocks that are sensitive to home sales shrugged off the disappointing data. For example, Home Depot (HD[4]) was off just 2 cents, or essentially unchanged on a percentage basis, to $74.67 in late morning trading. Lowe’s (LOW[5]), the second-largest home improvement retailer after Home Depot, gained 1%, or 49 cents, to $47.98.

However, the decline in existing homes sales and the rise in home prices took a toll on homebuilder exchange-traded funds.

The iShares U.S. Home Construction ETF (ITB[6]) dropped 2.2%, or 49 cents, to $21.61 in late morning trading. The Homebuilders SPDR (XHB[7]) shed 1.1%, or 33 cents, to $29.55.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Bankrate.com: http://Bankrate.com
  2. National Association of Realtors: http://www.realtor.org/
  3. [Image]: http://investorplace.com/wp-content/uploads/2013/10/Home-Prices-Existing-Homes-Sales-CHART.jpg
  4. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  5. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  6. ITB: http://studio-5.financialcontent.com/investplace/quote?Symbol=ITB
  7. XHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=XHB

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