Sales Falter; Should We Worry?

Sales growth has ground to a halt as we enter the waning days of 2015. Sales of existing homes dropped to 5.36 million on an annualized rate for October. That's a 3.4% decline from September sales. Year-over-year sales growth has dropped to 3.9%, the lowest reading since January.

Supply is still an issue. This has been case for at least the past two years. Though sales were down in October, that did not materially lift supply relative to sales. Supply currently stands at 4.8 months at October's sales rate. A year ago, supply stood at 5.2 months.

Some pundits have blamed weakening prices for the inventory decline. The median price for an existing home stood at $219,600 in October, a 0.9% decrease compared to September. Year over year, the median price is up 5.8%, while the average price is up 3.4%. Price appreciation is down, but it is reverting to more historical norms. We don't necessarily view this as bad, though it does mean home owners still saddled with negative equity are unlikely to find relief in the near future.

As for new home sales, they posted at 495,000 on an annualized rate in October. This was below consensus estimates, but was a 10.7% improvement over September sales. Supply is less of an issue in the new home market. At the current sales pace, supply has risen to 5.5 months, putting it near the historical norm of six months supply.

It appears home builders are either targeting more lower-end markets or seriously discounting their inventory. The median price of a new home dropped a severe 8.5% to $281,500 for October. Year over year, the median price is down 6%.

To be sure, sales data are backward looking, while sentiment is forward looking. But given recent trends in sales and pricing, we would not be surprised to see another decline in home builder sentiment in December.

Despite the recent spat of negative news, we remain positive. When economic growth is considered, it's possible the past two months of sales and price data are an anomaly. The economy continues to grow. Indeed, third-quarter gross domestic product (GDP) was revised up to 2.1% annualized growth. The initial report last month showed growth at 1.5%. Readings on consumer activity remain positive, which supports the contention that U.S. consumers continue to drive demand for U.S. production. A spending consumer is a confident consumer.

Should we worry?

We don't think so. The economy continues to grow. Strong job growth in October also provides a reason to remain bullish. If November job numbers come in as expected (with 200,000 or more new jobs), we would expect to see a positive trend form in home sales and pricing to start 2016.

 Information provided by Jessica Regan.

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