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Sterne Agee sees rising confidence, shrinking inventories

Top 25 housing markets show surprising strength in May

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A note to clients from Sterne Agee analyst Jay McCanless urges caution on the housing industry, based on a deep drill-down of existing, pending, median price growth and consumer confidence data in the top 25 markets the firm focuses on.

Despite its prudent concern, the report suggests there is reason for some optimism, McCanless said, and the report offers further insight into what the rest of 2014 may hold.

The analysis focuses on homebuilders Sterne Agee tracks within the top 25 housing markets. Sterne Agee focuses on the top 25 markets more than national housing trends because their homebuilders have approximately 68.5% of their community exposure in these 25 markets.

McCanless notes that local completed and pending home sales comparisons were above the national numbers in May.

“Top 25 existing home sales during May surpassed the national market with a 6.2% year-over-year (Y/Y) decline versus a 8.2% Y/Y drop for the national metric,” McCanless said. “Four of our top 25 markets showed Y/Y% improvement in closed sales, with Austin reporting the highest Y/Y growth at 4.1%.”

On pending sales, McCanless notes that approximately 18 of the 25 markets he tracks have pending home sales data, and pending sales for these 18 markets decreased by an average of 0.3% Y/Y in May, versus a 9.4% Y/Y decline nationally.

Eight of these 18 markets had a positive Y/Y% comparison in May, and four of these (Charleston, Denver, Jacksonville, and Sarasota) are in their third consecutive month of positive Y/Y growth.

Inventory on a “Months to Sell” basis rose slightly month-over-month, but it was below national numbers. 

“Historically, markets with less than 6 months of inventory to sell have been sellers' markets, which have provided homebuilders and existing home sellers the opportunity to raise prices. May's average months-to-sell reading was 4.1 in the top 25 markets, slightly above 4.0 in April, but lower than May's national average of 5.6,” he said. “Gross inventory in our top 25 markets increased 12.3% Y/Y for May, versus a 6% Y/Y increase in national inventory levels.”

The Houston and Chicago markets reported the largest decline in inventory levels for the fourth consecutive month, falling 8.0% and 8.4% Y/Y, respectively.

McCanless said the University of Michigan's Consumer Sentiment Index increased from 81.9 in May to an upwardly revised reading of 82.5 in June.

Additionally, the Conference Board's Consumer Confidence Index increased from 82.21 in May to 85.18 in June and the Composite Index of Leading Indicators reported the fourteenth month of consecutive improvement in May.

Finally, the average median price growth in the top 25 markets was 390 basis points ahead of the national numbers in May. 

“We monitor existing home price trends because we believe builder pricing power is currently a function of scarcity and local market price growth. Median Y/Y price growth averaged 7.7% this month for our Top 25 markets, versus 3.8% Y/Y price growth for national existing home sales,” he concluded.

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