U.S. existing homes sales continue to decline in August, likely to rebound in September

U.S. existing homes sales continued to decline in August and came in below market projections. Home sales dropped 0.9 percent in sequential terms to 5.33 million units, as compared with market expectations of a rise to 5.45 million units. The softness was predominantly seen in the single-family segment.

Sales in this segment fell for the second straight month, declining by 0.9 percent month-on-month to 4.7 million. In the meantime, sales in the condo/co-op segment, the smaller and more volatile segment, rebounded by 10.5 percent sequentially to 630,000 units, almost erasing the loss recorded in July.

The inventory of houses on the market continued to decline in August, weighing on resale activity. The number of for-sale homes dropped 3.3 percent on the month and was 10.1 percent down year-on-year.

Region wise, the declines in home sales were widespread, with closings dropping in three out of the four regions with the biggest drop seen in the South, where it recorded a fall of 2.7 percent sequentially. The West region also registered a decline of 1.6 percent, while the Midwest region saw a fall of 0.8 percent.  Only the Northeast region registered a rise in sales of 6.1 percent sequentially.

Low house supply in the market is exerting pressure on home prices. Median prices in August rose 5.1 percent year-on-year, a slightly rise from a 5 percent pace in July. In the midst of low inventory, houses continued to sell briskly, remaining on the market for 36 days on average, noted TD Economics in a research note.

The report came in quite disappointing. It is unusual to see declining existing home sales in an environment of continued job growth, low interest rates and strengthening housing balance sheets. Admittedly, the main reason for underperformance is low inventory of houses in the market and not demand for housing, said TD Economics.

In the midst of low supply of existing homes, consumers have been shifting their attention to the newly built homes. Newly constructed homes sales have been increasing for five straight months and are currently up 31 percent year-on-year. This might encourage homebuilders to increase construction further in the coming months.

Pending home sales data, which tends to lead existing home sales by around two months, implies that sales are expected to rebound in September, according to TD Economics.  But, supply constraints would not ease overnight, and low inventory would continue to be a drag on sales performance and affordability through the rest of 2016.

Hence, while home purchases are likely to continue to edge higher in the remainder of 2016 owing to job market gains and low mortgage rates, the rebound is expected to be gradual given the very low supply, added TD Economics.