Schwab Guide To Economic Indicators: Existing-home Sales

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Schwab Guide to Economic Indicators: Existing-home Sales
by the Schwab Center for Financial Research
November 30, 2007

What is it?
It’s a monthly sales report of existing homes at the national level and in four regions produced by the National Association of Realtors® (NAR). The types of homes covered by this report include single-family, townhomes, condominiums and co-ops. In addition to sales, the report also contains price and inventory data.

What is its relative importance?
Medium. It’s a lagging indicator. However, the report helps validate trends seen in the other forward-looking housing indicators, such as the monthly reading of housing starts and building permits produced by the U.S. Census Bureau. Housing does impact consumer spending, which accounts for nearly two-thirds of all economic activity. While the forward-looking housing reports usually have a greater influence on the Fed in setting monetary policy, the existing-home sales report provides useful confirmation.

What impact does it have on the market?
The degree to which existing-home sales, along with revisions, meet expectations is typically one of the most influential aspects of the report.

If the trend in sales exceeds forecasts in a way that hints the economy is overheating, bond prices typically fall (yields rise) on the outlook for greater overall economic demand, potentially higher inflation and an increased chance that the Fed will hike interest rates. Stock prices may also fall.

Why?

A rise in bond yields can make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell some stocks and put the proceeds into bonds. Even if corporate profit growth seems supported in this time of strong sales, the market will likely see it as being short lived given expectations for impending rate hikes and eventually slower economic growth.

Alternatively, if sales exceed forecasts during slack economic times, this can give a boost to stock prices. That's because the market’s expectation of potentially higher profit growth from greater economic demand can initially be the more influential factor in favor of higher stock prices. That is, for a period of time, it can be the more-dominant driver of stock prices, overshadowing the negative impact of rising bond yields (as discussed above).

How is it calculated?
The calculation starts with a monthly sample. According to the NAR, “Each month, the Research Division of the National Association of Realtors® receives data on existing-home sales (single-family, condos and co-ops) from local associations/boards and multiple listing services (MLS) nationwide. NAR captures 30-40% of all existing-home sale transactions with its monthly survey. The data provide the total number of closed existing-home sales in each association/board/MLS and also total sales within price categories ranging from less than $30,000 to more than $600,000.”

The NAR states, "the aggregated raw volume figures are weighted to accurately represent sales activity for each region of the country.” Finally, annualized figures are determined. “The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months.”

Sales are available on a seasonal and not seasonally adjusted annual basis.

In addition to the national figures, existing-home sales and prices (not seasonally adjusted) are available by geographic region:

Northeast,
Midwest,
South and
West.

Inventory figures (existing homes on the market) are provided on a national level.

How is it used?
While it’s used to validate trends seen in the other forward-looking housing indicators, the report contains some other useful price and inventory data.

The price data are important because they can, to some degree, provide insight into housing affordability and the buildup of equity. Obviously, higher prices can hurt affordability, but they can increase equity, which supports consumer spending. Therefore, the net effect from both is carefully monitored by the Fed.

Inventory data are used to determine demand and pricing trends. This is typically done by comparing inventories with sales rates to create a ratio. It’s expressed as the amount of months it would take to sell the existing inventory at the current sales pace. If the ratio is trending higher, it suggests the demand and price for existing homes could be softening.

In looking at the big picture of home sales, there are two types: new and existing. Both have their own respective values. Existing-home sales are important because they account for approximately 85% of total home sales. New-home sales are important because they are typically more responsive to changes in interest rates than existing-home sales. How? The difference arises based on when each is counted.

New-home sales are picked up quickly because they are booked when a contract to purchase is signed or when a deposit is accepted. This can occur before construction has actually started.

Existing-home sales generally take longer to be recorded because they are based on the closing date of the transaction.

While the new- and existing-home sales data are useful, it’s important to remember that they are lagging indicators. Most housing trends and related issues, such as interest-rate sensitivity, are detected earlier in the forward-looking housing starts and building permits report.

When is it released?
It’s released near the end of the month, usually between the 23rd and the 29th, and can be found at http://www.realtor.org/. From “Site By Topic,” click on “Research” to find the "Existing-Home Sales” tab.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

(2007-5771)

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