Existing U.S. home sales hit their lowest level in three years last month, according to the National Association of Realtors (NAR), which boosted the Direxion Daily MSCI Real Est Bear 3X ETF (NYSEArca: DRV) by as much as 2.7 percent on Thursday.
DRV seeks daily investment results equal to 300% of the inverse of the daily performance of the MSCI US REIT Index, which is a free float-adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index. DRV invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index.
According to the data released by NAR, existing home sales dropped 1.2 percent to a seasonally adjusted annual rate of 4.94 million units during the month of January. This was the lowest level since November 2015 and fell under analysts’ expectations of 5.0 million units.
However, the pace of December’s sales was revised slightly higher. January’s fall comes after ongoing weakness in the U.S. housing market as existing home sales are down 8.5 percent versus a year ago.
“Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low,” said Lawrence Yun, chief economist for the NAR. “Moderating home prices combined with gains in household income will boost housing affordability, bringing more buyers to the market in the coming months.”
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Rising Rates and Low Affordability to Blame
A combination of rising interest rates and low housing affordability are primarily to blame for the weakness in the housing sector, and mortgage lenders are preparing themselves for what could be another year of hurt in 2019. The Federal Reserve raised interest rates last December and the previous year’s tax cuts that gave the markets a slight boost will be tempered.
“We’re still seeing above-trend GDP growth that is likely to slow as the impact of last year’s tax cuts wears off with higher interest rates,” said Calvin Schnure, the National Association of Real Estate Investment Trusts’ senior vice president of research and economic analysis.
However, at the post-rate hike presser in December, Federal Reserve Chairman Jerome Powell was more dovish in his assessment of more rate hikes in 2019. As opposed to the initial three forecasted for 2019, the central bank now is expecting two rate hikes.
If rates can stay unchanged, this could help spur real estate demand.
“If mortgage rates stay close to these new lower levels, then the hit to affordability from rising rates will be reduced – and the positive impacts of the job market and demographics should flow through to stronger housing demand,” said David Berson, chief economist at Nationwide.
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