September Existing Home Sales
September existing home sales report was disappointing like housing starts. It’s not disappointing enough to end the positive housing trend, but it is slightly disconcerting. As you can see from the chart below, existing home sales fell from 5.5 million to 5.38 million. It missed the consensus for 5.44 million. It only beat the low end of the estimate range by 10,000. This was a 2.2% monthly decline and a 3.9% yearly gain. And, it was the 3rd straight yearly gain. Yearly growth rate was the best since March 2017.
Yearly comp was relatively easy and the monthly comp was very high. August’s reading was an 18 month high. It’s close to the cycle high in 2017. I think we could see a new cycle high in the next few months if housing stays strong. There just needs to be a pickup in inventory. The yearly comp will get extremely easy in December and January. But I don’t think many will be fooled by the high yearly growth.
3 month average in sales was up 0.6% to 5.433 million which was the best reading since May 2018 and the 4th straight improvement. Median price growth was 5.9% to $272,100. There have been 91 straight months of yearly price growth. This price growth was the strongest since January 2018. Price growth was heightened because supply was low. Higher prices could encourage more people to list their houses.
Inventory was steady at 1.83 million which is equal to a 2.7% decline from last year. Relative to sales, inventory is 4.1 months which is up from 4 months in August and down from 4.4 months last year. Single family sales were down 2.6% from last month as they were 4.78 million. Condo sales were 600,000 which is a 1.7% increase from August.
Soft Data Underperforming
A key trend over the past couple months of economic data has been the drop in soft data versus hard data. Some soft data reports make it look like a recession could be starting soon, while the hard data shows us that’s not the case. GDP is based on the hard data and the consensus for Q3 GDP growth is 1.6%. The fact that the soft data is coming in below that shows how weak surveys have been. So far, we have all the soft data from Q3 and some data on October. September hard data is still coming through. Obviously, it all will get revised in future reports.
The top chart below shows the Citi hard data surprise index in red and the Citi soft data surprise index in blue. It’s no shock that soft data reports are missing estimates given how weak sentiment has gotten because of the slowdown and the trade war. Given how long this expansion has been, I wouldn’t be surprised if some business leaders think the economy’s time is finally up. That’s not how it works, but it’s a common bias.
The bottom chart shows the relationship between the two. Difference between hard surprises and soft surprises is above 1 standard deviation. Similar action occurred in the past 2 slowdowns. If this was a recession, the hard data would be missing estimates too.
Q3 Earnings Season Has Been Below Average
Q3 earnings season is now 25% over which means we have much more data to comb through. Avoid the claim that earnings season is going poorly because growth is negative. Firstly, it’s not negative. Secondly, there’s more to earnings than absolute growth. The tables below show the results.
As you can see, EPS growth from the first 124 firms to report is 3.44%. It’s not necessarily bullish that earnings growth is positive. I was always expecting low single digit positive growth. If earnings growth was less than 2%, it would be bad news as the beats would be minimal.
As you can see from the bottom table, the 3 year average is for 77% of firms to beat EPS estimates with an average surprise of 4.64%. So far, 78% of firms have beaten EPS estimates, but the surprise rate is only 3.91%. Good news is it has recently gotten closer to the 3 year average. Sales growth is 2.95% with 66% of firms beating estimates which is 1% below average.
Tech has had a terrible quarter as expected because of the cyclical slowdown and the trade war. Bad news is only 13% of these firms have reported. We still need to get through most of them. Biggest one is undoubtedly Apple which will report results on October 30th.
Home Price Growth Falls
Usually, the Case Shiller Home Price index comes out on the same day as the FHFA home price index, but in October the Case Shiller report comes out on the 29th and the FHFA report came out on the 23rd.
August FHFA home price index showed disappointing growth as monthly growth was 0.2% which fell from 0.4% which was also the consensus. Yearly growth fell from 5% to 4.6%. This FHFA reading has been consistently higher than the Case Shiller index, which I follow closer.
It implies Case Shiller’s national home price growth rate of 3.2% in July will likely fall to near 3%. In the FHFA report, the strongest region was the Mountain region which had 6.5% growth. Weakest growth rate was 3.9% in the Pacific and the Middle Atlantic.
Conclusion
Existing home sales missed estimates, but the housing market is still headed in the right direction. This September report showed strong price growth, but the August FHFA report showed home price growth fell 0.4% to 4.6%. Soft data reports have diverged from hard data reports based on the Citi surprise indexes. Q3 earnings season hasn’t been terrible, but EPS beats have been below average.
Also, we’ve seen Q4 EPS estimates fall. Many are focused on how 2020 earnings will turn out. Don’t think they will be bad just because estimates are falling; they always fall. Results depend on if we see a cyclical recovery brought about by the global monetary policy stimulus.
Recent Comments