In July, US home sales rose to 4.01 million, beating the expected 3.92 million. This is a 2% increase from last month’s 3.93 million, despite a previous decline of 2.7%. Home inventories dropped to 4.6 months from 4.7 months last month, yet this is still a 15.7% rise compared to last year. The median home price climbed to $422,400, marking the 25th straight month of price growth. Sales of single-family homes also grew by 2% to 3.64 million, with a median price of $428,500. Condominium and co-op sales increased by 2.8% month-over-month, but were down 2.6% year-over-year, with a median price of $362,600. Regionally, the Northeast saw an 8.7% rise in sales, while the Midwest experienced a 1.1% drop from the previous month. The South had a 2.2% increase, and the West saw a 1.4% gain.

Market Dynamics

Homes stayed on the market for a median of 28 days. First-time homebuyers represented 28% of sales, and 31% of transactions were made in cash. Individual investors and buyers of second homes made up 20% of transactions, while distressed sales accounted for 2%. The stronger-than-expected home sales numbers indicate the economy is doing well despite higher interest rates. This durability may delay any potential rate cuts by the Federal Reserve. Futures markets originally pegged a 25% chance of a rate reduction by year-end, but now have lowered that to below 15%. Given these conditions, we should prepare for a “higher for longer” interest rate environment. This may involve buying puts on treasury bond ETFs or selling short-term interest rate futures to guard against rising yields. This mirrors the trends seen in 2023 when robust economic data often resulted in bond market sell-offs.

Investment Strategies

The decrease in first-time homebuyers to 28% highlights an affordability issue, which may pose challenges for homebuilder stocks. While demand remains stable, builders might need to keep offering financing incentives, potentially squeezing profit margins that have already been under pressure. This calls for a cautious approach, such as using covered calls on homebuilder stocks to earn income while limiting potential upsides. The increase in cash transactions to 31% and investor purchases to 20% indicates that the market is being fueled by buyers less affected by interest rates. With the average 30-year mortgage rate around 6.8% per the latest Freddie Mac data, many average wage-earning buyers are being sidelined. This creates a precarious situation for the housing market, which could be affected if investor sentiment changes. There is a distinct regional difference, with the Northeast performing well while the West lags behind, experiencing a 4.0% sales decline year-over-year. This divide suggests an opportunity for a pairs trade: go long on REITs heavily invested in the Northeast while shorting those focused on the West Coast. This strategy can protect against overall market movements while capitalizing on specific regional trends. Create your live VT Markets account and start trading now.

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