One of the most important economic sectors In the United States is the housing sector , it includes a variety of indicators, equally important in interpreting growth.
Existing Home Sales is one of them. A monthly release, it comes out in the second half of the month and refers to data at the end of the previous month.
For June 2020, the Existing Home Sales rose the most on record – a stunning 20.7%. Why is it good news?
Housing Sector Implications for the Economy
The housing sector triggers a ripple effect. As we have seen during the 2008-2009 financial crisis, the housing sector in the United States was responsible for a global financial crisis.
Everything matters in this sector. New owners buying a house usually begin renovating it, banks sell mortgages, and so on – selling a house has horizontal, positive economic effects.
While the data missed expectations by a bit, it still shows an impressive comeback in the housing sector. In a way, it is a normal reaction, given the incentives offered by banks and the low interest rates set by the Fed. Moreover, in the words of Fed’s Powell, the Fed is not even thinking of thinking of raising the federal funds rate anytime soon. Hence, it has never been a better time to take up a mortgage or to refinance an existing one.
Talking about housing loans, in the United States, non-recourse loans are used for such transactions. It means that the buyer poses the asset (i.e., the house) as collateral, and, in case of default, the bank seizes the collateral, sells it, gets what it gets on the sale, but cannot seek out the borrower for any further compensation. This differs completely from Europe, for example, and represents an incentive for Americans to buy a house. A sweetener, if you like.
It explains the details of the June Existing Home Sales report. For instance, data published by the National Association of Realtors shows that 35% of the sales in June came from first-time buyers, while only 16% were cash sales.
All in all, a positive report reflecting the housing sector’s resilience. It also gives hope that other sectors will turn the corner sooner rather than later, stimulated by the strong numbers seen in the housing sector.
On the flip side, the number of mortgage delinquencies increased dramatically since March 2020. Only interpreting both data correctly can an investor form the right opinion about the state of the American housing sector.