Home Sales Are Up: Bad News in Disguise

Pop the Champagne! Sales of existing homes rose more than expected in April, jumping 7.6 percent from March to 5.77 million units. That means a whopping 22.8 percent more homes were sold than in April of last year, according to the National Association of Realtors.

Wait a minute. Hold that cork.

It sounds like good news, but it isn't. Now that the tax credit is gone, there really isn't much to motivate buyers.
Sure, the monthly gain surpassed most estimates: Analysts surveyed by Dow Jones had expected a rise of 4.7 percent, while those polled by Thomson Reuters predicted growth of 5.6 percent.

The NAR, a Realtors' lobbying group which publishes the data, chalked the increase up to last-minute buyers rushing to take advantage of the Obama administration's two housing tax credits – for first-time and repeat homebuyers – which expired at the end of April.

"It's like shoving everything through a hose," says Andrea Heuson, finance professor at the University of Miami. "It gushes out for a while, but when the pressure goes away, everything slows down again."

An even bigger problem is supply. The NAR says that total housing inventory soared 11.5 percent at the end of April from a month earlier. This means that it would take 8.4 months to sell all the properties, if sales continue at the current pace.

Even Larry Yun, the NAR's usually optimistic chief economist, told MarketWatch that the inventory was an "unwelcome" development. Such high inventories are likely to prevent big price gains over the next year or two, he said, although he couldn't say where the supply is coming from exactly.

Could it be the dreaded shadow inventory: homes destined for foreclosure but which haven't gotten there yet?

Heuson says it's too early to tell, because the market is still dominated by speculative buyers – people with money who are scooping up dozens of properties because prices are so cheap.

By the way, NAR's existing-home sales data is a pretty good indicator of supply and demand, but some prefer to watch the Department of Commerce's new home sales release, due on Wednesday. Stay tuned.

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