Economists and housing analysts got a jolt Monday when a key report on the real estate market came in much stronger than expected. The National Association of Realtors announced that December existing home sales jumped 7 percent from the previous month, although they remain 4 percent below their year-earlier levels. But don't uncork the champagne just yet; a closer look at the figures suggests the report isn't as optimistic as it first appears.
Here are four things you should know about the December existing sales report.
1. Bargain hunting: The increase in sales was driven mostly by sharply lower home prices, as property owners offered discounts and banks slashed prices on foreclosed properties. The median existing home price plunged more than 15 percent, to $175,400, from December 2007. Meanwhile, distressed sales made up 45 percent of transactions, NAR said. "Nationwide home prices dropped by the most on record in December, slumping to the lowest level in almost six years," Mike Larson, of Weiss Research said in a report. "That caused some bargain hunters to step off the sidelines."
2. Data Bounce Back: In addition, the December increase follows two consecutive months of declines in existing home sales. "Sales were up in December mainly because they plunged in November," Patrick Newport, U.S. economist for IHS Global Insight said in a report.
3. Inventory Shrinks: The report also found that the inventory of unsold homes shrunk 12 percent. The glut of unsold homes has been a key factor in driving down prices, and working off excess inventory is essential to restoring the market to health. But Richard Moody, the chief economist at Mission Residential, says December's inventory data isn't telling the whole story. "One factor that likely helped magnify the decline in inventories in December was that many lenders and local governments had imposed moratoriums on foreclosures over the final months of 2008," Moody said in a report. "As these start to expire, and as deteriorating economic and labor market conditions push more homes into the foreclosure process, inventories are likely to rise. Along with what we believe will be declining sales over coming months, this will likely lead to a reversal of the seeming progress made on the inventory front in December."
4. Rally time? Still, any uptick in sales is a welcome development for the beleaguered housing market. But in the face of a slew of fierce headwinds--the recession, unemployment, slowing household formation, the credit crunch, and so on--a sustained housing recovery remains and uphill battle. "Can the momentum be sustained in the face of rising unemployment and tighter lending standards?" Larson says. "Only time will tell. But it's hard to imagine a lasting turn in the housing market with thousands of layoffs being announced every few days."