Existing Home Sales Rise in October: Will the Rally Last?

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Sales of previously owned homes increased in October for the second straight month, marking the best performance since June. However, low inventory is limiting the choice of prospective buyers and keeping price growth elevated.

Shares of prominent homebuilders such as D.R. Horton Inc. DHI , Lennar Corporation LEN , Toll Brothers Inc. TOL , KB Home KBH , PulteGroup, Inc. PHM , escalated yesterday after the release.

October Existing Home Sales Data

As revealed by the National Association of Realtors (NAR), existing-home sales increased 2% in October to a seasonally adjusted annual rate of 5.48 million units from 5.37 million in September. However, sales declined 0.9% from the year-ago level, marking the second consecutive year-over-year decline primarily due to shortage of supply. Moreover, the housing industry is yet to recover from the natural disaster that ravaged parts of Texas and Florida.

Meanwhile, October's median sales price grew 5.5% from the comparable period a year ago to $247,000, marking the 68th straight month of year-over-year gains.

Again, inventory continues to slip, leaving less homes for future sales. The supply of existing homes decreased 3.2% from September and 10.4% from the year-ago period. It would take just 3.9 months to deplete the current supply of homes in the market, according to NAR. This is also the lowest October reading since the group began tracking the data in 1999.

Will the Momentum Continue?

The U.S. housing industry is gradually recovering from damages caused by the recent hurricanes in the South. Again, limited land availability is driving prices higher. Apart from concerns over chances of a series of interest rate hikes by the Federal Reserve, homebuilders continue to struggle with growing labor shortage, higher material costs and a constrained mortgage environment. These are restricting homebuilders to respond to the growing demand.

Besides, economists are of the opinion that a tax overhaul could add to the volatility in the market in the coming months. The measure would limit the mortgage-interest deduction on newly purchased homes at $500,000. This is quite a dramatic shift from the current cap of $1 million. The proposed capping of the mortgage-interest deduction could be damaging to pricier coastal markets that have been showing some strength in sales activity in recent times.

Despite the above-mentioned woes, new residential construction in the United States increased more than expected in October 2017, reinstating strength in the housing industry. Per the latest jointly released report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, constructions for new homes increased 13.7% in October 2017 to 1.29 million units (seasonally adjusted annual rate) from the prior month. This also marks the biggest surge in 12 months as housing starts witnessed big gains in single-family homes and apartments.

Again, confidence among homebuilders rose in November to its highest reading in eight months to 70 and second-highest since the recession (July 2005), according to the Housing Market Index by the National Association of Home Builders ("NAHB") and Wells Fargo.

Bottom Line

The latest positive housing data undoubtedly reassures the industry's strength courtesy of solid economic growth amid supply shortages and the ongoing recovery from hurricanes in Florida and Texas. Consistent job growth along with seemingly high homebuilders' confidence is adding to the momentum.

Moreover, a good industry rank (Top 21% out of more than 256 industries) for homebuilding further supports the growth potential. In fact, in the last three months, the Zacks Homebuilding Industry has widely outperformed the broader market (S&P 500), as you can see below:

Major homebuilders such as KB Home, NVR, Inc. NVR , TRI Pointe Group, Inc. TPH and Toll Brothers Inc. are well poised on the bullish fundamentals of the housing market.

While, KB Home, NVR and TRI Pointe sport a Zacks Rank #1 (Strong Buy), Toll Brothers carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

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PulteGroup, Inc. (PHM): Free Stock Analysis Report

Lennar Corporation (LEN): Free Stock Analysis Report

Toll Brothers Inc. (TOL): Free Stock Analysis Report

KB Home (KBH): Free Stock Analysis Report

D.R. Horton, Inc. (DHI): Free Stock Analysis Report

NVR, Inc. (NVR): Free Stock Analysis Report

TRI Pointe Group, Inc. (TPH): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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