Economists' Commentary: Existing Home Sales in October

November 23, 2009

By Lawrence Yun, Chief Economist

Existing home sales increased solidly for the second straight month and by the largest percentage gain in at least ten years in October. Sales rose 10.1 percent to reach 6.10 million on a seasonally adjusted annual rate basis. For comparison, sales had been consistently under 5 million from October of 2008 to mid-2009.

Though the tax credit deadline was recently extended to the middle of next year, the first-time home buyers in October were evidently hurrying to meet the set tax credit deadline of closing the deal by the end of November. The strong sales brought down inventory to a near-historical average and the home price decline was the smallest in over a year. Inventories at the end of October represented a 7.0 months' supply with 3.57 million homes available for sale. The months' supply is now at the lowest level in two and a half years (or more precisely since February 2007). Back in early 2007, home values were just starting to fall in the low single-digits. Subsequently, inventory ran up to double-digit months' supply and double-digit price declines. But sales increases in recent months have trimmed away the inventory to bring the months' supply back down to 7 months. Sometime in spring of 2010, supply could fall below 6 months, at which point home values could begin to show consistent, modest price increases.

The Midwest region already is showing signs of price gains. The median price this October was 1.1 percent higher compared to last October in the Midwest. If there is one region best positioned for a quicker home value recovery, it is in the Midwest because it is the region that did not experience a price bubble. Furthermore, the tax credit carries a bigger weight in consumer decision because home values are so affordable in the Midwest. An $8,000 tax credit means a lot in Indianapolis, for example, where there are many homes priced under $100,000. The same $8,000 has a lesser impact in high-cost regions of the country.

For the country as a whole, the national median existing home price in October was $173,100, which is a decline of 7.1 percent compared to one year ago. It was the lowest percentage decline in over a year (in 16 months, to be exact).

Condo sales have been rebounding better than single-family in recent months. The condo market also has had a bigger boom and deeper bust compared to the single-family market over the current housing cycle. From month-to-month up to October, condo sales increased 13.2 percent while single family home sales rose 9.7 percent. Compared to one year ago, condo sales have risen by 40.8 percent while single family sales have risen 21.4 percent. There is also a continuing difference between the two property groups in terms of inventory; condo inventory is higher at 9.0 months' supply, while single-family inventory is steadily getting trimmed and is currently at a 6.8 months' supply. Not surprisingly, condo prices declined more steeply by 10.4 percent while single family home prices were lower by 6.8 percent.

The above stated figures for home sales are seasonally adjusted to be consistent with GDP and other economic data reporting methods. Raw (or non-seasonally adjusted) home sales have seasonal trends with sales generally weakening from September and continuing to February, before a solid upturn in the spring buying season. For example, home sales closings in January and February (reflecting contract signings over the holiday season) typically are about half of the peak selling season in late spring to early summer. So if sales typically decline 20 percent on a raw count from autumn to winter months, but this year turns out to be much different with only a 5 percent decline in the raw sales count, then one can infer that sales were "better" this winter than in the past. The 'seasonally adjusted figures' account for that type of difference and hence will likely show up as a 'rise' in seasonally adjusted home sales data even though the raw sales actually declined.

Another easier way to account for the seasonal patterns is to simply compare the latest month's sales figures with those from the same month one year ago. By this measure, the total sales rose 23.5 percent from one year ago. Regionally, sales were higher by nearly 30 percent compared to the same month one year ago in the Northeast, Midwest, and South regions. In the West, sales were higher by a less-pronounced 12 percent. The bottom line is that the housing market is doing much better now than one year ago, whether by seasonable, adjusted data or by raw data.

Again, the homebuyer tax credit deadline was to finish in November (before being extended and expanded to many move-up buyers). This no doubt hurried people to complete the deal in October. We may also see a similarly strong November sales figure to be reported next month. However, we should expect a notable decline in sales in December and January. The home buying process is not a snap decision that can be completed in few weeks. It takes about 3 months to search, visit homes, get an appraisal and mortgage approval, sign contracts, etc. After a few months of declines in sales in December and January and even February, we do anticipate steady resurgence in home sales through the middle of next year. The hope is that by the time inventory has shrunk sufficiently home values will actually increase on a consistent basis. Given that home values have overcorrected going down, a modest home price increase will be a positive factor for home buying as buyers no longer need to wait for further price decline.

Interestingly our survey of REALTORS® about their recent clients showed that home buyers are buying with greater confidence. Currently, 70 percent believe home values will rise next year. Earlier in the year, 60 percent of buyers believed home values would actually fall over the next 12 months.

So has the housing market bottomed?  It depends on which indicator you look at.

Is there any more positive news? Foreclosures? No, we have at least six more months of rising foreclosures. Housing starts? No, homebuilders cannot compete with distressed property sales and they cannot obtain financing to start construction. New home sales? No, since builders are not bringing new homes on line. Existing home sales? Most definitely. Home prices? Almost, with inventory steadily getting reduced. Housing wealth? We're almost there.

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.

NAR members, learn how you can add this commentary to your Web site, blog, or newsletter. Read more >