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Economic Indicators: Existing Home Sales
By Ryan Barnes
Background
The Existing Home Sales Report is a monthly release covering the number of existing homes that were closed during the survey month along with average sales prices by geographic region. The "closed" distinction is important because most closing periods are anywhere from six to eight weeks, so values listed are likely to relate to sales made about two months prior. The data is collected and released by the National Association of Realtors.
There are three important metrics in this report; in addition to the aggregate number of existing homes sold and median selling prices, inventory levels are provided through the "months supply" figure, a number that represents the length of time in months required to burn through all of the existing inventory measured during the period.
Data is provided raw and with seasonal adjustments. This is because weather is a big factor in determining month-to-month demand. As with the Housing Starts Report, the data is also broken down by geographic region (Northeast, Midwest, South and West). Price data will show percentage changes from the year-over-year period and the prior month.
What it Means for Investors
Whereas the Housing Starts release deals with construction levels and is therefore a supply-oriented housing indicator, existing sales are much more about aggregate demand among consumers. While not included in the Conference Board's U.S. Leading Index, existing home sales are considered a leading indicator as well because higher levels are typically reached when the economy is coming out of a recession. The inventory metric also points to how much slack exists in the housing market, as a high reading in the month supply figure means that prices could fall as inventory is worked down to more normalized levels. (For more insight, see What are leading, lagging and coincident indicators? What are they for?)
Besides business cycle considerations, prevailing mortgage rates are the biggest factors to consider when evaluating the sales levels. All else being equal, as rates rise, sales will fall as consumers wait for a more opportune time to purchase a home. If home sales are strong, other consumer industries may see an uptick in sales, such as home improvement retailers and retail mortgage lenders.
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Because of the lag between when a sale is made and when closing occurs, the report is not as timely as the Housing Starts Report, but the sample size is larger and less likely to have large revisions. Also, condominium sales are included in this report, but not in the starts report.
Strengths:
- Large sample size
- Together with housing starts provides a clear picture of the strength of the housing market.
- A key leading indicator and predicator of future consumer purchases such as home furnishings and insurance services.
- Shows the level of demand within housing market.
- Released before the New Home Sales Report in the given month
- Includes condo sales, which are not included in the Housing Starts Report
Weaknesses:
- No detailed information on types of homes, just median sales prices.
- Subject to large bouts of seasonality
The Closing Line
The Existing Home Sales Report can be a good leading indicator during times of concern over the housing market in general, and is best used in conjunction with the Housing Starts report
Next: Economic Indicators: Factory Orders Report
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