Existing Home Sales – West Coast Slowdown Continues

Dan Oppenheim
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SEE LAST PAGE OF THIS REPORT Dan Oppenheim , CFA

FOR IMPORTANT DISCLOSURES (415) 889-5617

doppenheim@ssrllc.com

October 19th 2018

Existing Home Sales – West Coast Slowdown Continues

  • Sales off sharply in the west, impacting builder profitability. We’ve seen the most significant change in California and the west, based on the stretched affordability, impact of tax changes, and rising inventory, with existing sales in the west falling 12.2% year/year in September. This is particularly important for the homebuilders as California and the west drive significant profitability, with Toll Brothers (TOL) generating 73% of pretax homebuilding profit from the area; KB Home (KBH), 70%; and William Lyon (WLH), 51%.
  • Slower sales to impact home improvement spending. We expect the lower level of existing home sales (down 3.4% sequentially and 4.1% year/year in September) to drive less DIY and remodeling activity, as existing home sales typically lead repair/remodeling activity by four quarters, and we expect to see slowing comp sales for Home Depot (HD) and Lowe’s (LOW) in the quarters ahead “More than Just a Pause in Housing”.
  • Inventory up year/year for second straight month. Existing home inventory fell less than seasonal in September and is up 1% year/year, with inventory rising year/year for the second straight month and up 29% from the low level at the end of 2017. This upward trend – driven by both slower sales activity and rising new listings – reinforces our concerns, with the 4.4-month supply of homes for sale in September at the highest level in two years, and likely to rise further.
  • Less urgency among buyers and decreased pricing power for sellers. We expect prospective buyers to recognize the smaller pool of buyers and higher inventory, taking more time and making less aggressive initial bids. In addition, as existing home sales are recorded at closing (with September sales reflecting contacts signed in July/August), we expect to see a further reduction in sales, given that mortgage rates in October are approximately 30 basis points higher than in July/August. Sellers are reacting to the reduced demand and increased competition from other properties for sale, as the percentage of listings with price reductions is at the highest level since the housing downturn.
  • Continue to prefer rental sector over for-sale; see risk to home centers. We favor the multi-family and single-family REITs over the homebuilders. We believe the home centers are at greatest risk, with valuations not factoring in the risk of slowing home improvement spending as housing turnover slows. Please see heat map of preferences on page 2.

Exhibit 1: Rising Inventory to Impact Pricing Power in Months Ahead

Source: National Association of Realtors and SSR analysis

Exhibit 2: SSR’s Preferences Among Housing-Related Sectors

Source: SSR analysis

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