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Home Sales Contracts Slow, But Strongest August Since 2006 As Supplies Tighten

The NAR reported a decline in the number of contracts to purchase existing homes in August, with a seasonally adjusted decline of 1.6%. That was better than economists’ consensus expectations of -2.3%. Fooled again! Too pessimistic again. Economists don’t seem to be able to get a handle on the nature of housing bubbles.

If you have been reading these pages for any amount of time, you recognize that the seasonally adjusted headline number may or may not represent reality. It isn’t the actual number, and depending on the seasonal adjustment factor, the headlines are all too often misleading.

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The actual number of contracts fell 1.3% in August on a month to month basis, which is roughly equivalent to 1,500 units. Since this is an unadjusted number, in order to judge whether this represents strength or weakness we must compare it with past Augusts. The average change for August over the prior 10 years was an increase of 1.2%. This August was weaker than average and much weaker than the August 2012 gain of +4.1%.

Contracts To Purchase Existing Homes- Click to enlarge

Contracts To Purchase Existing Homes- Click to enlarge

Whether this was a result of weaker demand due to higher rates or the fact that many buyers were stymied by tighter than ever inventories is debatable. In fact, contracts were up 2.9% over August 2012 when mortgage rates were far lower than they were this August. We could reasonably conclude from that that higher rates have not materially suppressed demand, and that tight inventories are playing a role in suppressing sales. In my 40 years in or analyzing the housing business, I have  noted that rising rates have always stimulated demand until they became so high as to make prices unaffordable.

The only time I saw that dynamic was in 1981-92. For the most part, rising rates have stoked an inflationary psychology in housing, motivating people to buy now to beat both rising prices and rising interest rates. That psychology is certainly at work now with prices rising nationally on average at the rate of 16-18% annually.

Tight inventories continue to impact the market, driving the price bubble and possibly restricting the number of sales. With demand still in an uptrend, a larger increase in inventories would be required to put a lid on the price gains.

Existing Home Inventory/Contracts Ratio- Click to enlarge

Existing Home Inventory/Contracts Ratio- Click to enlarge

The inventory to contracts ratio stood at 4.85 in August, up only slightly from 4.77 in July, and up a bit more versus the seasonal low of 3.95 in March. This is a 7 year record low for the month of August, down from 5.32 in August 2012 and a peak of 10.28 in August 2007. While a normal seasonal rise in this ratio is under way, the downtrend has not yet reversed. Prices are likely to continue rising until the trend of this ratio turns materially higher.

Earlier I reported that Housing Recovery Is An Illusion While Housing Inflation Rages. Current data from several other sources contradicts the idea promoted by the mainstream media that the housing bubble is slowing due to the rise in mortgage rates. The risk of an approaching Housing Crash II is still growing as house prices gain at the rate of 16-18% per year nationally, and far faster in the hottest bubble markets.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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