US July Existing Home Sales Will Largely Beat Expectations

Authored by Christophe Barraud,

In a little under an hour, the National Association of Realtors (NAR) will release the Existing Home Sales (EHS) for July. According to the Bloomberg consensus, EHS should increase by 14.4% MoM to 5.40M SAAR, which would be the highest level since February 2020.

EHS will largely beat expectations due to technical and fundamental factors:

  • Buyers signed contracts in June (and to a lesser extent in May) for most July sales. As a result, July EHS will start reflecting post-reopening activity

  • Buyers benefited from favorable market conditions with mortgage rates close to the lowest level on record

  • Recent announcements from corporates suggest that home-improvement activity (correlated to existing home sales) is booming

  • Local/state reports confirm that sales rebounded on a YoY basis (non-seasonally adjusted: NSA) in July, which should translate into a sharp increase on a MoM basis (seasonally adjusted: SA).

  • It would be coherent with the recent bounce in Pending Home Sales (PHS)

1. Data construction implies that July will start reflecting post-reopening activity

Most of economists never looked at the construction of EHS data which explains a large part of miscalculation. According to the Census Bureau, “the majority of transactions are reported when the sales contract is closed. Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore, an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.” In other words, most buyers placed their offers in June (and to a lesser extent in May), when the reopening phase gained traction. As a result, July existing home sales will start reflecting post-reopening activity.

2. Buyers benefited from favorable market conditions

Fundamentals improved with a sharp decline of mortgage rates. According to Freddie Mac, this week, the average for a 30-year fixed-rate loan remained below 3.00%, which is close to the lowest level on record.

3. Recent announcements from corporates suggest that home-improvement activity is booming

Two companies specialized in home-improvement published their quarterly results earlier this week, which showed that sales grew at a strong rate compared to last year. I follow closely their statements given that, usually, home-improvement activity is closely correlated with existing home sales:

On Tuesday, Home Depot, the world’s largest home improvement retailer, reported sales of $38.1 billion for the second quarter of fiscal 2020, a 23.4 percent increase from the second quarter of fiscal 2019. Comparable sales for the second quarter of fiscal 2020 were positive 23.4 percent, and comparable sales in the U.S. were positive 25.0 percent. “These record results were driven by broad-based strength across our stores and geographies.

On Wednesday, Lowe’s Companies, the home improvement retailer, reported sales for the second quarter were $27.3 billion compared to $21.0 billion in the second quarter of 2019, and comparable sales increased 34.2 percent. Comparable sales for the U.S. home improvement business increased 35.1 percent for the second quarter.

4. Local/state reports confirm that sales rebounded on a YoY basis in July

Local/state figures suggest that national existing home sales (non-seasonally adjusted: NSA) are likely to rebound on a YoY basis in July. There is anecdotical evidence that many households chose to relocate due to coronavirus pandemic with some of them prefering suburbs. It’s also interesting to note that existing home sales in areas with beach resorts experienced strong gains from a year ago. As a matter of fact, according to information released by the Northeast Florida Association of Realtors, in July, there were 3,514 sales, a 15.8% increase from a year ago. Using my sample of local/state data and a seasonal adjustment factor higher than last year (less favorable), I expect exiting home sales to jump by more than 20% MoM (seasonally adjusted: SA) in July.

5. A strong increase in Existing Home Sales would be coherent with the recent bounce in Pending Home Sales

As the National Association of Realtors (NAR) noted, “The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.

In this context, It would be coherent if EHS finally catch up with PHS as suggested by the chart below.