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At 10:00 A.M. (EDT), the investment community received the latest key piece of U.S. economic data in the form of existing home sales, and at first blush it was a mixed snapshot of an industry that for the better part of the last year has produced some very positive results. Specifically, according to the National Association of Realtors, sales of existing homes fell 0.6%, to a seasonally adjusted rate of 4.92 million, in March. The consensus expectation called for sales of 5.01 million residences last month.

A closer look, though, paints a slightly brighter picture for the steadily recovering housing market. First, the sequential monthly setback was due primarily to inventory constraints rather than a lack of demand. According to Lawrence Yun, the National Association of Realtors’ Chief Economist, “Buyer traffic is 25% above the year ago when we were already seeing notable gains in shopping activity.” And although the figure came in modestly below consensus expectations, sales have now have been above year-ago levels for 21 consecutive months. The supply/demand imbalance is also pushing home prices higher, which have risen year over year for 13 consecutive months. The national median existing home price for all housing types was $184,300 in March, which is 11.8% higher than March, 2012. Moreover, distressed homes—foreclosures and short sales—accounted for 21% of March sales, down from 25% in February and 29% in March, 2012. The decrease in distressed properties on the market is also a sign that the industry is improving and leaving behind the difficult times that engulfed the industry during the recession years of 2007 to 2009.

However, one problem for the housing market moving forward is the strict lending standards that are now in place, which, even with low mortgage rates and affordability conditions at historically favorable levels, are making it harder for individuals to secure a home mortgage. According to Mr. Yun, “Underwriting standards remain excessively high.” Not surprisingly, total housing inventory at the end of March increased 1.6%, to 1.93 million existing homes available for sale, which represents a 4.7-month supply at the current sales pace, up from 4.6 months in February. Still, listed inventory remains 16.8% below a year ago when there was a 6.2-month supply. Mr. Yun opined that “we need a housing supply of over 6 months to have a generally balanced the market between home buyers and sellers, but is unlikely to get there without greater increases in housing construction”. Our sense is that such a scenario augurs well for the major homebuilding companies, most notably builders like Lennar, PulteGroup, D.R, Horton, and Toll Brothers, over the next year.

All in all, it appears that industry fundamentals are continuing to strengthen, despite what the headline flash number would seem to suggest. Too, more homes are expected to go on the market next month ahead of the summer buying season, which should help to somewhat alleviate the supply/demand imbalance that has emerged in recent months, one that is keeping sales of existing properties from surging ahead. 

At the time of this article’s writing the author did not have positions in any of the companies mentioned.