Existing Home Sales Plunged 16.7% in December

The nearly year-long, positive trend in the U.S. housing sector ended 2009 on a sour note, as existing home sales plunged 16.7% in December to a 5.45 million-unit annualized rate, the National Association of Realtors announced Monday. Sales fell as the federal government's original tax credit program expired. December's existing sales tumble was the largest one-month drop since the NAR started keeping records for this statistic.A Bloomberg News economists survey had expected December existing home sales to fall to a 5.90 million-unit annualized rate, from a 6.54 million units in November and 6.10 million units in October.

Inventories also went in the wrong direction, as existing homes rose to a 7.2-month supply at the current sales pace, up from 6.5 months in November and 7 months in October. Despite December's rise, inventories have fallen 11.1% in the past year. Economists say a normal existing home sale market has a 3- to 5-month supply.

However, investors and potential homebuyers should keep in mind that the U.S. Congress extended and expanded the home purchase tax credit -- $8,000 for first-time buyers and $6,500 for current homeowners - - and buyers now have until April 30, 2010 to sign a purchase contract to take advantage of the incentive.

"A Period of Swings"

Lawrence Yun, NAR chief economist, said the reduction in housing demand as the federal government's original homebuyer tax credit expired was unmistakable.

"It's significant that home sales remain above year-ago levels, but the market is going through a period of swings driven by the tax credit. We'll likely have another surge in the spring as homebuyers take advantage of the extended and expanded tax credit," Yun said, in a statement. "By early summer, the overall market should benefit from more balanced inventory, and sales are on track to rise again in 2010. However, the job market remains a concern and could dampen the housing recovery -- job creation is key to a continued recovery in the second half of the year."

In addition, the U.S. median home price in December for all types of housing was $178,300, which represents a 1.5% increase compared to December 2008. The median existing single-family home price was $177,700, a 1.4% rise from December 2008. The median existing condominium price was $183,700, a 1.0% increase from December 2008.

Housing's Ripple Effect

Economists and market analysts closely follow the monthly existing home sales statistic because previously owned homes account for the bulk of U.S. home sales. Moreover, they follow U.S. housing activity because the sector doesn't operate in a vacuum. When homes are sold, buyers tend to purchase durable goods and big-ticket items for the new home: furniture, appliances, landscaping equipment, home care supplies, etc. An uptrend in these categories would be good news for the economy and bullish for U.S. stock markets.

By region, December's existing home sales plummeted 19.5% in the Northeast, but the median price rose 3.2% to $241,700 compared to a year ago. Sales plunged 25.8% in the Midwest, where the median price rose 1.8% to $143,200. In the South, sales sank 16.3%, with the median price edging 1% lower to $152,000. And in the West, sales declined 4.8%, with the median price rising 2.7% to $236,000.

Although the December report is obviously disappointing, it's not unexpected, given the expiration of the original homebuyer tax credit. The size of the decline -- a record 16.7% plunge -- is alarming, however. The increase in existing home inventory is also a drag.

Taken together, the sales drop and inventory rise show a housing sector with soft demand conditions. And it points out that the sector really needed the extension of the homebuyer tax credit (and it may need yet another extension). Beyond government supports, however, housing clearly will require sustained U.S. job growth in 2010 to keep sales pointed in the correct direction -- higher.
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