Hold Your Horses! There Was Good News Today


Existing-home sales increased last month to the highest level since November 2009, and if you exclude the momentary boost from the first-time home-buyer tax credit that year, it was the highest reading since May 2007. Lest there be any doubt, this is unquestionably good news.

According to the National Association of Realtors, total existing-home sales -- defined as "completed transactions that include single-family homes, townhomes, condominiums, and co-ops" -- increased by 4.2% in May over the preceding month and 12.9% over the same month of last year. In addition, the national median sales price for previously occupied homes rose to $208,000, a 15.4% increase over 2012.

At the same time, however, all is not well in the land of housing. "The housing numbers are overwhelmingly positive," NAR chief economist Lawrence Yun noted. "However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent."

Yun is referring here to the available supply of homes for sale. And, as you can see in the chart below, it remains significantly depressed. The current inventory of homes on the market equates to only 5.2 months' worth of sales. The long-run average, meanwhile, is 7.2 months, or 39% higher.

Paradoxically, on the heels of this otherwise good news, shares of the nation's largest homebuilders are plummeting. PulteGroup is down by 10.8%, D.R. Horton has lost 8.8%, and Lennar has dropped 7.8%. What gives?

The answer is tied to fear that the U.S. Federal Reserve is on the verge of tapering its purchases of long-term Treasuries and mortgage-backed securities. At a news conference yesterday, Fed Chairman Ben Bernanke hinted that it could do so later this year and into 2014. The net result would be to increase mortgage rates (which have already shot up), which, in turn, would increase the cost of purchasing and owning a home.

Over the past few quarters, all three of these companies have seen new-home sales pick up considerably. On a year-over-year basis, Pulte's are up by 23%, D.R. Horton's have gained 34%, and Lennar's are up 28%. If prices head considerably higher, however, these gains could be in jeopardy.

The one consolation for these companies is that they aren't alone. The Dow Jones Industrial Average lost more than 300 points today, with every one of its 30 components trading in the red. This marks the eighth day in a row in which the blue-chip index has notched a triple-digit move. All told, since its high point at the end of May, the Dow is down by 3.4%.

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The article Hold Your Horses! There Was Good News Today originally appeared on Fool.com.

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