Huge Drop in Existing Home Sales No Reason to Panic

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The news today is full of headlines screaming about the steep drop in sales for existing homes. December saw the "biggest monthly drop in 40 years," according to the Associated Press.

But no need to panic. Experts knew a big drop was coming in December as sales got back to a sustainable level, following a huge spike in sales the month before in anticipation of the federal home-buyer tax credit expiration.

Existing homes sold at a seasonally adjusted annual rate of 5.45 million in December, according to the National Association of Realtors. That more than a million fewer sales than the annualized rate of 6.54 million in November.

But remember, November was the biggest month for existing home sales in years. Sales surged last fall from September through November as homebuyers hurried to take advantage of the federal home buyer tax credit, which was originally set to expire (but has since been extended). And, compared to the last three years, December's existing home sales rate is not bad at all.

The rate of existing home sales for December is faster than the overall rate of sales for 2009 of 5.16 million. It is also much better than 2008's rate of 4.91 million sales, and is close to 2007's rate of 5.65 million.

"The market is going through a period of swings driven by the tax credit," says Lawrence Yun, chief economist for the Realtors association. "We'll likely have another surge in the spring as home buyers take advantage of the extended and expanded tax credit," he adds.

Meanwhile, incentives like the tax credit seems to be doing their job by encouraging homeowners to buy up unsold homes.

There are now fewer home available for sale than any time since March 2006, according to the Realtors assocation.

The total inventory of homes available for sale fell to 3.29 million homes at the end of December. That's down 6.6 percent from the month before; it's 11.1 percent less than a year ago, and 28.2 percent below the record of 4.58 million in July 2008, just before the financial crisis exploded. December's inventory of 3.29 million homes works out to a 7.2-month supply at the current rate of sales - according to analysts, a healthy inventory level is 6 months.
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