US existing home sales activity to rebound at moderate rate in near term

Existing home sales in the US fell in February by 7.1% m/m to 5.08 million units (annualized) after growing strongly for two consecutive months. The fall in existing home sales was stronger than consensus forecast of a drop of 3.1% m/m to 5.31 million. Weak activity was recorded across the board. Single-family homes sales fell 7.2% m/m to 4.51 million units, while condos and co-ops sales also declined by 6.6% m/m.

Total inventory of houses available for sale continues to be tight. It declined 1.1% y/y. Still, slowdown in February sales rose the inventory-to-sales ratio that increased from 4 to 4.4 months in the month. On an annual basis, the median home price rose 4.4%, significantly slowing from January’s 8.2% y/y reading. Prices of single-family segment grew 4.3% y/y, whereas those of the condo and co-op prices increased 5.1% y/y.

Region wise, activity declined throughout the country. The most significant falls were seen in the Northeast and Midwest, which recorded drops of 17.1% m/m and 13.9% m/m, respectively. Meanwhile, the slowdown was less pronounced in the West and South, which registered declines of 3.4% m/m and 1.8% m/m, respectively.

In February, existing home sales declined significantly after gaining exceptionally in the prior two months. The slowdown can be partially attributed to temporary factors such as the East Coast blizzard, which probably affected contract signings in January. Demand might have also been tempered by lower consumer confidence and increased financial market volatility.

Still, the overall housing sector outlook continues to be moderately favorable given the supportive fundamentals, such as increasing employment and incomes, and better access to credit that will continue to increase consumer formation and housing demand.

Borrowing costs will continue to be low. In February, interest rates remained lower, with rates on 30-year mortgages dropping 37 basis points since the beginning of 2016 to the lowest level since April 2015. While interest rates are likely to rise in 2016 as a whole, the rise will be very slow. This was further repeated at the FOMC meeting last week where the Committee lowered its forecast for the interest rate hikes, bringing it down to two in 2016.

In spite of these tailwinds, the activity will continue to rebound moderately in the near term due to low inventory of houses for sale and price increased that continue to surpass income gains.