KEY DATA: Sales: +5.6%; Inventory (Over-Year): -9.7%; Median Prices (Over-Year): +5.8%
IN A NUTSHELL: “Strong sales and a scarcity of inventory are causing home prices to soar.”
WHAT IT MEANS: Yesterday we saw that new home sales were on the rise and today we got a similar result from the existing home data. The National Association of Realtors reported that home sales jumped in November after increasing solidly in October. The sales pace was the highest since December 2006. Sales were strong in three of the four regions with only the West posting a small decline. The robust sales pace is exceeding the number of homes being brought onto the market. As a result, inventories have fallen to levels that are almost half what they should be, given the sales pace. That has caused prices to surge. There is little doubt that prices will continue to increase sharply as there are no signs people are changing their minds about selling their homes.
MARKETS AND FED POLICY IMPLICATIONS: This was a really strong report that indicates the housing market has pretty much wiped out all the losses, in terms of both sales and prices, which occurred as a result of the housing bubble bursting. But that doesn’t mean there are no issues. The percent of homes bought by first time buyers is falling as the rising prices make it harder afford even an entry-level house. The tax bill, if it increases growth even a little bit, could lead to higher inflation and rising interest rates. This would also pressure the market. And the reduced deductibility of state and local taxes and mortgage interest could pressure prices in high cost states. Nevertheless, it is a good sign that the demand is strong and likely to support further sales gains as well as additional home construction. As for investors, now that the tax bill is done, they will have to actually see better growth or the valuations that may have been made on the basis of a stronger economy could prove to be questionable. Remember, once the corporate tax cuts are recognized, firms have to increase earnings from that higher level. And that will only happen if they actually expand their top line. Taxes hit the bottom line. That said, there is little doubt that firms will reward their investors by using lots of the newfound profits to increase dividends, buy back stock and expand merger and acquisition activity. Those should bolster stock prices, at least for a while.