Economists' Commentary: Existing Home Sales in December

January 26, 2009

By Lawrence Yun, Chief Economist

Home sales increased in the final month of 2008, but the increase should be viewed as only a partial rebound after a big tumble in November sales. Existing home sales (single-family plus condos and coops) increased 6.5 percent to a seasonally adjusted annual rate of 4.74 million units from a downwardly-revised 4.45 million unit pace in November. Compared to the same month one year ago, existing home sales were down by 3.5 percent.

Sales continue to be the strongest in areas where home prices have come down sharply. Many markets in California, Arizona, Nevada, and Florida are witnessing sales growth of 50 percent or higher from one year ago. Boston, Providence, Hartford have begun to show life signs with several months of rising sales (from a comparable period year before). Minneapolis, Cleveland, many Michigan markets have begun to see rising sales in the Midwest. Northern Virginia and Denver were other large metro markets with improved sales.

Among the four major regions, the sales and price trends were:

• In the Northeast, existing home sales fell 1.4% and prices declined 7.8%
• In the Midwest, sales rose 4.0% and prices fell 11.4%
• in the South, sales increased 7.4% and prices fell 8%
• in the West, sales increased 13.6% and prices tumbled 31.5%
• More details are here.

Rising sales ate into inventory but there is always a seasonal pull-back in December as many homeowners pull the listing off the market to reassess before the start of a new year. Inventories generally fall in December by about 8 to 10 percent and it was no different this time. Inventories at the end of December fell notably by 11.7 percent to 3.68 million from 4.163 million in November. But in another sense, the latest cut of 487,000 homes on the market is much larger than usual 200,000 to 300,000 fewer listings in December. Fewer listings and higher sales helped lower months supply measure to 9.3 months of inventory.

The lower inventory had no impact on prices, however. The national median existing home price in December was $175,400, which is a decline of 15.3 percent from one year ago. That decline is the largest decline in home price since 1968 when NAR began tracking housing data and probably the largest since the Great Depression.

Regarding single-family versus condo market, the condo market is taking a beating. Investors generally prefer condo properties, but the underwriting standards are far more stringent for condo loans in general and for investors in particular. From one-year ago, single-family sales fell 1.4 percent, while condo sales declined 18.4 percent. Single family home prices fell 14.8 percent while condo prices declined 18.3 percent.

With December figures completed, we now have annual total figures. Existing home sales in 2008 was 4.912 million, a decline of 13.1%. Single family sales fell 11.9 percent, while condo annual sales declined 21 percent. The annual median price of $198,600 was a decline of 9.3 percent, which marks the lowest since 2004. The annual median price was $219,600 in 2005, $221,900 in 2006, and $219,000 in 2007.

From the peak price of $230,200 set in July 2006, prices are 24% lower now. There is a bit of an apples to oranges comparison due to sample mix issues in summer months versus the winter months, where more larger sized homes get transacted in summer. To partially overcome the sampling problem, from December 2005 to December 2008, home prices fell 21%.

Interest rates are at historically lows. However, in the past few days, both Treasury yield and mortgage rates have trended higher by 40 basis points. This follows comments by Tim Geithner - the Treasury Secretary designee - on the need for a weaker U.S. dollar against the Chinese Yuan. Such a comment will hurt the ability to issue government bonds and lead to higher interest rates.

Given that the low rates are lifeblood for the housing market, any comment on the dollar need to be carefully crafted so that rates do not get harmed. Without low rates, the housing market will not recover. Without housing, the broader economy will not recover.

Distressed sales continue to account for about 45 percent of all sales (foreclosed or short sales requiring lender approval.

The economic stimulus plan will soon pass and must include plans to prevent home prices from overshooting downward. Falling home values lower housing wealth and lead to contractions in consumer spending. Falling home values lead to rising foreclosure rates and will worsen bank balance sheets. That is why an incentive must be provided to homebuyers to offset the natural pessimism in the market place. Home prices will stabilize only when inventory is soaked up by new set of buyers. Homebuyer tax credit, lower interest rates, and permanently higher loan limits are therefore critically needed.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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