Existing homes sales dip unexpectedly

Existing homes sales unexpectedly fell 2.7 percent in August to a seasonally adjusted 5.10-million unit annual rate, the National Association of Realtors announced Thursday. It was the index's first decline in five months.

Economists surveyed by Bloomberg News had expected August existing home sales to total a 5.35-million-unit annualized rate. In the four monthly gains prior to August, existing home sales had risen 15.2 percent. Existing homes sales totaled a 5.24-million-unit pace in July.

Silver lining: Inventories falling

However, despite August's lower-than-expected sales total, there was a significant silver lining in the August data: inventories fell, continuing that metric's downward trend, something that will gladden the hearts of home builders and realtors alike. Inventories fell 10.8 percent to 3.62 million units, or to an 8.5-month supply in August at the current sales pace, down from 9.3 months in July.

Moreover, if the inventory decline continues, it will remove excess housing inventory that flooded the market after the housing bubble burst, creating conditions from which a home price recovery can start. A healthy, normal existing home sales market typically has a three-to-five month supply of homes on the market.

"Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process, but the decline demonstrates we can't take a housing rebound for granted," NAR Chief Economist Lawrence Yun said on the group's website.

In August, the national median existing home price for all housing was $177,700, or down 12.5 percent from August 2008. The median existing single family home price was $177,500, down 12.1 percent from a year ago; for condominiums, it was $179,300, down 15.7 percent.

The breakdown, in August, by region: Northeast, sales declined 2.2 percent, prices fell 10.5 percent from August 2008 to $241,100; Midwest, sales decreased 6.6 percent, prices dropped 10.4 percent to $149,900; South, sales fell 3.1 percent, prices declined 11 percent $157,400; and in the West, sales dipped 2.7 percent, prices decreased 12.2 percent to $220,500.

Investors should 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 a barometer of overall U.S. economic strength.

Housing Analysis: Due to the large decline in prices, there's reason for cautious optimism regarding existing home sales, and that view won't change, despite August's disappointing sales dip. A one-month decline does not a retrenchment make, and the important point for investors to remember is that existing home sales had trended up for four straight months, and the sector shows signs of having bottomed.

That said, a double-dip slump regarding existing home sales is not out of the question, which is one argument for Congress to extend the $8,000 federal income tax credit for first-time home buyers, something lawmakers are reviewing.
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