Rise in Home Sales Sparks Optimism

Pundits and investors jumped on better-than-expected housing data to inject some rare exuberance into the market. As existing home sales for November rose to their highest level since February 2007, industry watchers predicted a buying spree in 2010, and offered hopes of a stabilizing housing market. Stocks rallied on the news.

The surge in home sales came as buyers scrambled to close deals before a new home buyer tax credit deadline on Nov. 30. The credit was subsequently extended. And a tax break for repeat home buyers that expires on April 30, 2010 should keep the momentum going.
Existing-home sales rose 7.4 percent in November, to a seasonally-adjusted annual rate of 6.54 million units -- a dramatic 44 percent higher than November 2008, and the third consecutive monthly gain, according to a report released Tuesday by the National Association of Realtors. First-time buyers accounted for 51 percent of the November sales.

"This clearly is a rush of first-time buyers not wanting to miss out on the tax credit, but there are many more potential buyers who can enter the market in the months ahead," said NAR chief economist Lawrence Yun. "We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit, which hopefully will take us into a self-sustaining market in the second half of 2010."

The typically upbeat NAR expects 4.4 million households to claim the tax credit before it expires in April. As inventory continues to decline, the group expects balance to be restored to the housing sector.

There are likely to be bumps, however. "I think the rates and tax incentives create great urgency, but the real driving force is price," Greg Rand, managing partner with Better Homes and Gardens Real Estate Rand Realty in New York, told HousingWatch.com. Rand predicted a drop off in sales after the April contracts close in June-July. "But it won't mean the recovery is stunted," he said. "The result of all of this will be a sense of recovery that will last."

Given the historically low mortgage rates coupled with the two years of declining home prices, homeowner affordability has never been this advantageous, even with the expiration of the home buyer tax credit, said David Adamo, Chief Executive Officer Luxury Mortgage Corp, Stamford, CT. "In an era of caution, there is good reason to feel cautiously optimistic about the year ahead."

Rand predicts a new wave of foreclosures as banks abandon loan modification efforts and start taking properties back. That, in turn, will send buyers and investors into the market. "It will be the best buying opportunity that we've seen since the mid 1990's," he said.

In a reverse sort of logic, extending the government tax credits for home-buyers could negatively affect the market. By doing so, it creates a sense that the incentives will go on forever, causing buyers to lose that sense of urgency.
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