Existing-Home Sales Dip Slightly in August

Existing-Home Sales Dip Slightly in August

Overall report is good, says Jim Haughey, but difficulty in measuring inventory begs caution

Jim Haughey, Chief Economist, Reed Construction Data September 24, 2009 HousingZone.com

Existing-home sales dropped to a 5.10 million annual rate in August after soaring to 5.24 million in July. Nonetheless, the August total reported by the National Association of Realtors is the second highest in a year and half. The housing recovery is still solidly underway but, as expected, is not as robust as the initial burst of growth in the previous few months suggested. One or more additional brief reversals in either the new- or existing-home markets should be expected in the next six months.

Overall, the August existing-home sales report is encouraging news. Home prices were down only slightly in August from July and above median prices reported earlier in the year. The inventory of existing homes for sales dropped nearly 11 percent. This much overestimates current market trends, but it does confirm that the inventory overhang is shrinking. The surplus inventory and the associated discount pricing is the most serious constraint on new home sales.

Caution: inventory is always difficult to measure in any market. It is likely that the actual level of homes for sale inventory is large then reported because not all foreclosed homes are listed with Realtors. Many homes available for short sale to avoid foreclosure are also not listed. This measurement problem does not invalidate the reported declining trend in surplus inventory, but it does suggest that a return to normal inventory levels will take longer than the reported inventory and sales data suggest.

Reed Construction Data expects existing home sales to rise 10 percent over the next year. The slow improvement in home prices and inventory is being supplemented by several very positive market drivers. The home affordability index, while recently slipping 20 points to 158.5 remains solidly in housing boom territory due to continuing income gains and slipping mortgage rates. Home buyer confidence, while much depressed, is now progressively rising. And the Federal Reserve Board remains committed to providing enough capital to finance a housing market expansion at current interest rates.