Economist's Commentary: March 21, 2008

Mild Increase in Existing Home Sales

By Lawrence Yun, Chief Economist

The latest reading on home sales further confirms stabilizing trends. Existing home sales increased 2.9 percent in February to a 5.03 million unit pace from a 4.89 million unit pace in January. Since the August credit crunch — home sales have been stuck at around the 5 million unit level. Prior to the credit crunch, sales had been running at around 6 million in the first half of 2007. The current soft lower sales number is reflecting the virtual disappearance of the subprime loans.

Sales are still down substantially from a year ago. The latest figure was 24 percent lower from February 2007. Regional sales changes from a month ago:

• In the Northeast Region, sales rose 11.3 percent
• In the Midwest Region, sales rose 2.5 percent
• In the South Region, sales rose 2.1 percent
• In the West Region, sales fell 1.1 percent

As to home prices, the median national home price fell to $195,900 in February, which is 8.2 percent below a year ago. The lower price reflects continuing buyer's market conditions with a clear oversupply at 9.6 months supply of inventory (compared to about 5 months of supply just two years ago). In addition to the excess inventory, lower transaction prices from multiple listing services also reflect disproportionately fewer high-end home sales. The jumbo loan market (those loans requiring higher than $417,000) continued to be dysfunctional throughout February with a spread in excess of 100 basis points above conforming loan interest rates, and there were far fewer home sales on the high end, which naturally brought the median sales price lower. The sharp 13.4 percent price decline in the West region is partly due to far fewer jumbo loans being utilized.

Though still very high, inventory declined by 126,000 in February to 4 million homes listed for sale. It is very unusual for inventory to decline from January to February, but it did this year. Perhaps sellers are holding off listing, or the rush of speculators/investors that brought properties onto the market place in 2007 has tapered off.

Condo sales performed better than single-family, which hints that astute investors are coming into the market at faster rate than genuine owner-occupant homebuyers because condos are preferred property of investors.

There are so many local market variations that it is difficult to generalize on one single theme. As mentioned the Northeast region showed a solid rise in home sales which helped firm up home prices in the region. At the same time, sales increases were recorded in areas with a substantial decline in home prices such as in Sarasota (Fla.), Fort Myers (Fla.), and Sacramento (Calif.). Lower prices are inducing buyers back into the market. Home sales also increased in regions with solid local job market conditions and still affordable, yet rising, home prices. Amarillo (Texas) and Topeka (Kan.) are examples. Strong markets like Austin (Texas) lost a bit of steam with fewer sales but continued to show solid price gains.

A detailed breakout of sales by major regions and by property types can be found here.

Existing home sales are anticipated to remain similarly soft through the first half of 2008. FHA loans will play an important role in lifting sales later in the year, but many lenders first need to get HUD approval. The FHA loan market share was only 2 to 3 percent in 2007 and any return to its historic market share of 15 to 20 percent will greatly revive home sales. Moreover, a recent law permitting Fannie and Freddie to pick up loans in excess of the $417,000 limit will help lower interest rates on many jumbo loans. The economy is also anticipated to pick up momentum in the second half of the year, which will help lift consumer confidence.

In summary, today's rising sales data is encouraging in at least hinting that we are very close to the low point for home sales. But one should never read too much into a single month of data. Nonetheless, the logic of recent home sales figures having already accounted for the disappearance of subprime loans and the anticipated rise in FHA loans and Fannie/Freddie backed jumbo loans, suggests better market conditions as we proceed through the year. Finally, there are still great local market variations and what is happening with the national aggregate figures may in no way reflect what may be occurring in your local market areas.

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

Comments? Questions? E-mail NAR Research.