The National Association of Realtors released its report on September home sales Friday morning, reporting that existing home sales fell by 1.7% during the month.
Since the housing market was a major catalyst for the recent financial crisis, any sort of bad news has the ability to boost fear that the current housing recovery is starting to falter. Investors could easily view today’s drop in existing home sales as a reason to panic, but there is much more going on that should keep fears at bay for the time being.
So far this year, housing has been a bright spot in the economy, and today’s report on existing home sales should not change that. Obviously we would have loved to see existing home sales rise in September, but there are plenty of reasons to remain optimistic.
The median price of existing homes sold during the month was $183,900. This is up 11.3% from the same period last year. This fact alone should be enough to convince people that the housing market continues to improve.
During the housing crisis, falling home prices were a major reason the situation got so out of control. As people watched their home values fall below the amount they owed on theier mortgages, it made it very easy to justify just walking away from their homes and allowing them to enter foreclosure.
Lower home prices made it a great time to buy if you were a first-time homeowner, but it made it hard for homeowners to sell, because in many cases they would have to make up the difference to their lenders. This led to the foreclosure mess that not only shattered the housing market, but pulled down the overall economy.
So the fact that home prices are trending higher is great news. Another positive for the housing market is that inventories are moving in the right direction. The housing crisis resulted in a steep rise in inventories, but we saw the inventory of homes available for sale drop 3.3%.
With September’s decrease in inventories, we are now looking at just 5.9 months worth of homes for sale. This is the lowest inventory level that the market has seen since March 2006.
When the housing market was running at full strength, home building was adding nicely the nation’s economic growth, but this has not been the case since 2005. Analysts are forecasting that home building will actually add to economic growth this year, something that the nation’s fragile economy desperately needs.
Goldman Sachs has predicted that home building will add about 0.25% to GDP this year, and another 0.5% next year.
Another piece of encouraging news came on Wednesday with the news of better-than-expected housing starts during the month of September.
September witnessed a 15% jump in housing starts versus the same period last year, to the highest level we have seen in the last four years. Beginning home construction rose to an annualized rate of 872,000 units, the fastest rate since July 2008.
Toll Brothers (TOL), the nation’s largest luxury home builder, reported a 57% jump in new orders during the quarter ending in July versus the same period last year, another clear indicator that the housing market is headed in the right direction.
So should we be worried about the dip in existing home sales in September? No, not really. We should be aware of it, and look to make sure it does not happen again in October, but a one-month drop is not enough to raise too many red flags considering the number of positive indicators we are seeing.
With most housing stocks outperforming the market so far in 2012, a lot of investors are fearful to jump into the sector. While it is true that you should never follow the herd, in this case we believe that there is still some upside left in the home builders.
If you want to get into the sector, but want to do so cautiously, you may want to consider an ETF such as the iShares Dow Jones US Home Construction (ITB). Establishing a position in ITB allows you to diversify over a wide range of homebuilders, so you can benefit from future upside, but protect yourself against weakness in any one of the builders in the group.
|Michael Fowlkes is a financial writer that has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors.|