The U.S. housing industry was back on track in October as existing home sales and housing starts showed a significant improvement. Not only are these metrics are building strength, the confidence level among builders is also strong in the November reading. Historically low interest rates, continuous job expansion and higher earnings are undoubtedly contributing to the growth.
Encouraging Home Sales Data
On Thursday, the National Association of Realtors (“NAR”) stated that existing home sales — which account for more than 90% of total U.S. home sales — increased 1.9% in October to a seasonally adjusted annual rate of 5.46 million units from September’s 5.36 million. Also, sales were up 4.6% from 5.22 million units reported a year ago.
However, the October figure lagged market expectation of 5.49 million units by 0.6%.
Regionally, Northeast sales, which account for the majority of existing home sales, fell 1.4% to 690,000 units from a month ago but were in line with the prior-year period. Sales in the West also decreased 0.9% to 1.13 million units, but grew 3.7% year over year. Sales from the Midwest and South advanced 1.6% and 4.4% from September 2019, and 2.4% and 7.8% from October 2018, respectively.
Median sales price in October rose 6.2% from the comparable year-ago period to $270,900, marking the 92nd straight month of year-over-year increase. Median home prices grew in all regions, with the strongest price gain recorded in the West.
Total housing inventory at the end of October declined 2.7% from the previous month and 4.3% from the prior-year period. At October’s sales pace, it will take just 3.9 months to deplete the current supply of homes, down from 4.1 months in September and 4.3 months in October 2018.
The uptick in most of the abovementioned metrics reflects that buyers are excited to reap benefits from favorable market conditions, despite supply-side challenges. Meanwhile, NAR President Vince Malta also stated that home sales and housing permits growth will be favorable for real estate investment in America going forward.
Will This Momentum Sustain?
The homebuilding industry plays a prominent role in the evaluation of overall economic growth. Per the latest report from the National Association of Home Builders, the housing share of GDP rose for the first time in six quarters, increasing to 14.6% in third-quarter 2019. The upside was led by rising single-family permits since April and an increase in single-family starts since May. The report also states that the home building and remodeling section increased to 3.11% of the total GDP and added 0.18 basis points to the overall GDP growth rate.
Meanwhile, the industry, which includes biggies like Lennar (LEN - Free Report) , D.R. Horton (DHI - Free Report) , PulteGroup (PHM - Free Report) , KB Home (KBH - Free Report) and the likes, is highly sensitive to interest/mortgage rate fluctuations. Per the recent Freddie Mac Primary Mortgage Market Survey, 30-year fixed mortgage rate dropped 115 basis points over a year to an average rate of 3.7%.
The latest housing statistics — housing starts and building permits — also trended higher in October, with a rise of 3.8% and 5% from September, respectively. The housing starts marked the second-highest gain, while building permits recorded the highest level in more than 12 years.
Builders’ sentiments for newly-built single-family homes also remained firm in November, thanks to the above-mentioned factors. Per the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), confidence level slipped just one point in November from the 20-month high October reading of 71. Notably, this marks the second-highest reading since June 2018.
In addition to residential rebound, growth in public sector construction activity — mainly in large transportation projects and contract work for highways — as well as solid pricing are benefiting construction companies.
This positive momentum can be substantiated by its share price performance. The Zacks Building Products - Home Builders industry has outperformed the broader S&P 500 composite year to date. The industry has gained 51.1% compared with the S&P 500 Index’s rally of 22.8%.
However, persistent lack of properties for sale has inflated home prices and kept many buyers, most importantly millennial, on the sidelines. First-time buyers accounted for 31% of sales, down from 33% in the prior month and in line with the year-ago period. Moreover, NAR revealed that the annual share of first-time buyers in 2019 was 33%. In the words of NAR’s chief economist Lawrence Yun, “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.”
Although the housing space is caught up in the year-long trade tussle between the United States and China and is facing shortage of land and skilled labor, the recent sales data is encouraging.
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