Market Overview

Existing Home Sales Rise Less than Expected

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The Existing Home Sales Report measures the number of existing residential buildings that were sold during the previous month. This report helps investors gauge the strength of the U.S. housing market and is an indicator of overall economic strength.

Thursday's report states that 4.55 million existing residential buildings were sold in May. This reading is lower than the 4.57 million expected by economists. Resultantly, Thursday's number might be bearish for the U.S. housing market.

Total existing home sales are completed transactions that include single-family homes, townhomes, condominiums and co-ops.

According to the National Association of Realtors (NAR), limited supplies of housing inventory held back existing-home sales in May. However, sales maintained a strong lead above year-ago levels and home prices were on a sustained uptrend in all regions.

May's seasonally adjusted annual rate of 4.55 million homes was 1.5 percent lower than April's 4.62 million reading, but represented a 9.6 percent increase from the 4.15 million-unit pace in May 2011.

Lawrence Yun, NAR chief economist, said in a note that inventory shortages in certain areas have been building all year.

"The slight pullback in monthly home sales is more likely due to supply constraints rather than softening demand. The normal seasonal upturn in inventory did not occur this spring," Yun said.

"Even with the monthly decline, home sales have moved markedly higher with 11 consecutive months of gains over the same month a year earlier," he continued.

An increase in existing homes sold implies a healthy housing market, and housing has an impact on the rest of the economy. Increases in homes sold suggest increased household income and thus an economic expansion.

The National Association of Realtors represents the real estate finance industry and compiles existing home sales information.

ACTION ITEMS:

Bullish:
Traders who believe that Thursday's existing home sales results are a leading indicator for the broader economy might want to consider the following trades:
  • Short building companies like PulteGroup (NYSE: PHM) because less houses being sold might indicate decreased demand for additional new homes and as a result less demand for home builders.
  • Short companies like Louisiana-Pacific (NYSE: LPX), that manufacture and distribute products and materials for home construction.
Bearish:
Traders who do not believe that Thursday's new data are a leading indicator for the general housing market may consider alternative positions:
  • Long building companies like KB Home (NYSE: KBH) because an initial sell-off related to Thursday's housing data might be overdone.
  • Long do-it-yourself stores like Lowes (NYSE: LOW) or Home Depot (NYSE: HD). If home sales decrease, homeowners might be more likely to fix their current places of residence.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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