What’s Really Behind the Headlines for May’s Surging Home Sales
Judging by all the headlines alone, you’d conclude that the U.S. housing market is in full recovery mode (it isn’t) and that the U.S. economy is heading in the right direction (it’s not).
In response to existing-home sales data, USA Today’s headline read “Existing home sales up 4.9%; best gain since ’11;” CNBC’s headline declares “US existing home sales, inventory surge in May;” and The Wall Street Journal opines “Existing Home Sales Rise Strongly in May.”
Is the hype justified? Not if you dig below the headlines. First, the (so-called) good news. According to the National Association of Realtors, existing-home sales in May climbed 4.9% month-over-month to a seasonally adjusted rate of 4.89 million, up from 4.66 million in April. This marks the second monthly gain in a row. It’s also the fastest pace since October, the last time annualized sales surpassed the five million units mark! (Source: “Existing-Home Sales Heat Up in May, Inventory Levels Continue to Improve,” National Association of Realtors web site, June 23, 2014.)
All good? Not quite. There’s more to May’s existing-home sales data than the numbers at the top of the press release.
First-time homebuyers, a benchmark for how well the economy is doing, accounted for just 27% of all activity, down from 29% in April. The annual decline is even worse. In May 2013, first-time homebuyers accounted for 28% of sales; in May 2012 it was 34%; and in May 2011 it was 36%. Why is this a concern? The 30-year average for first-time homebuyers—and a number economists consider ideal—is 40%! (Source: Schmit, J., “First-time buyers losing out as home sales rise,” USA Today web site, June 29, 2013.)
So who’s propping up existing-home sales? Investors with lots of cash. All-cash sales made up 32% of transactions in May, with individual investors snapping up 16% of existing homes. What was the biggest winner? Homes in the $1.0-million-plus bracket—even though they only account for 2.4% of transactions. The biggest losers? Homes listed up to $500,000—in particular, those under $250,000.
What about new-home sales data? Again, all is rosy on the surface. Fox Business’ headline reports that “New Home Sales Soar to Six Year High in May;” Business Insider’s headline reads “New Home Sales Boom;” while ABC News’ headline proclaims “US New Home Sales Rocket Higher in May!”
Again, on the surface, it’s all good. Sales of new homes in the U.S. climbed 18.9% month-over-month to a seasonally adjusted rate of 504,000—the highest level in six years. (Source: “New Residential Sales in May 2014,” U.S. Census Bureau web site, June 24, 2014.)
Now granted, the report comes with a margin of error of plus or minus 17.3%. And sales of newly built homes only account for about 19% of all home-buying activity in the U.S…so there’s that.
Again, dig into the numbers a little, and you’ll discover all is not well. When it comes to new homes sold by sales price, there are some clear winners. On the plus side, the number of new homes sold between $150,000 and $199,999 increased from 6,000 in May 2013 to 10,000 this year. The only other clear winners were homes sold between $400,000 and $499,999 (up 133% at 7,000), and $500,000 and $749,999 (up 100% at 4,000). Homes over $750,000 were steady at 1,000.
The real new- and existing-home sales data isn’t all that surprising when you factor in high underemployment, high debt levels, stagnant wages, a sluggish economy, and rising home prices.
Not everyone agrees, though. If you think the U.S. housing market has rebounded, you might want to consider looking at a residential construction company like Toll Brothers, Inc. (NYSE/TOL) or The Sherwin-Williams Company (NYSE/SHW). If, on the other hand, you’re bearish, it might be a good idea to short stocks that rely on the U.S. housing market.