Existing home sales up, but prices down

It doesn't take an MIT mathematician to figure out that it's a home buyer's market in most areas in the United States, and February's existing home price data provides further confirmation.

Existing home sales rose 5.1 percent in February to a seasonally-adjusted annual rate of 4.72 million units, the National Association of Realtors announced Monday, with price cuts serving as a key driver of activity. The median sales price plunged 15.5 percent in the past year to $165,400. The February sales pace exceeded the Bloomberg News consensus estimate, which had seen a 4.49-million-unit annual pace. Existing home sales totaled a 4.4 million annual pace in January.

The new, federal tax credit for first-time home buyers appear to be having some impact on sales, in conjunction with other factors, particularly falling prices.

That said, investors need to keep the positive news on rising existing home sales in perspective: the U.S.'s economic fundamentals remain weak -- a reality that will weigh on corporate revenue and earnings until they start heading north. "The decline in home prices and presence of deeply discounted foreclosures has increased affordability and enticed bargain hunters," Michelle Meyer, an economist at Barclays Capital Inc. in New York, told Bloomberg News Monday. "However, rising unemployment, depressed confidence and expectations of home-price depreciation serve as powerful offsets."

Meanwhile, inventories rose 5.2 percent to 3.8 million -- which represents a 9.7-month supply at the current sales rate, the NAR said.

Home prices drop in every region

Further, the higher-sales-on-discounted-prices trend was pervasive – impacting sales in every region of the country, with the Northeast seeing the biggest sales increase, 15.6 percent. The breakdown, by region: Northeast, sales surged 15.6 percent, median prices fell -4.8 percent to $251,200; Midwest, sales increased one percent, prices dropped -14 percent to $131,000; South, sales rose 6.1 percent, prices fell -10 percent $146,700; West, sales climbed 2.6 percent, prices plummeted -30.3 percent to $204,600.

Investors need to follow existing home sales because they constitute the bulk of sales in the U.S. residential real estate market (single family houses, condominiums, co-ops). Further, because housing affects economic activity in many other sectors, economists and business executives view existing home sales as barometer of overall U.S. economic strength.

Economic Analysis: The February rise in existing home sales is encouraging, but as noted, investors need to keep in mind the qualifiers: 1) after large sales declines over almost three years, this sector has no where to go but up; 2) the median existing home price continues to fall: that has to bottom to represent a meaningful positive for the economy, and 3) mortgage market conditions remain constrained, with only superior-credit mortgage applicants obtaining the loans they seek.

Bottom Line: Don't look for enduring improvement in existing home sales and its sizable impact on GDP until lay-offs subside and household formation increases.

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