Home Sales Slide Resumes: 5 Things to Know

The existing home sales report for January strangled the optimism out of the previous month's.

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After bouncing back a month earlier--thanks largely to bargain hunters--existing home sales resumed their downward slope in January, dropping more than 5 percent from December and nearly 9 percent from January of last year, the National Association of Realtors said Wednesday. "So much for the much-touted signs of stability that many analysts saw in the December sales report that showed a bump up in sales," Richard Moody, the chief economist at Mission Residential, said in a report.

[Check out Housing Rebounds--or Does it? 4 Things to Know]

From the report:

A high prevalence of distressed home sales, and of those in lower price ranges, has skewed the median price to be markedly lower than under normal market conditions. The national median existing-home price for all housing types was $170,300 in January, down 14.8 percent from a year earlier when the median was $199,800 …

About a quarter of all inventory is listed as being distressed, but NAR estimates that distressed sales – foreclosed or those requiring a lender-mediated short sale – comprised about 45 percent of all sales in January.

Patrick Newport, an economist with IHS Global Insight, argues that home sales are being driven by a "tug-of-war" between distressed sales and withering demand. "Distressed sales (foreclosures and short sales) in three Western states are driving sales up. Driving housing sales down is weak demand across most states," Newport said in a report. "In January, weak demand won out."

Here are five things you need to know about the existing home sales report for January:

1. Remember 1997? Mike Larson of Weiss Research called January's housing report "dismal," noting that the sales rate dropped significantly faster than had been forecast. "Combined sales of single-family homes [are] now plumbing depths unseen since 1997," Weiss said in a report. "Prices tanked almost 15% from last January, leaving the median price of an existing home at a level unseen since March 2003 -- almost six years ago."

2. Job security: Larson argues that although tighter lending standards and plummeting consumer confidence are contributing to the crummy housing market, job security is now the leading factor in the sales decline. "If Americans are worried they won't have a job next month, next quarter, or next year, you've got a real problem," Larson said. "It doesn't matter if mortgage rates are 3% or 8%. People just aren't going to buy many houses."

3. Phantom inventory: Although January's 9.6 month supply of unsold homes was up slightly from the previous month, it's down modestly from November, when it stood at 11 months, Newport said. "But the improvement may be illusory because of the so-called "phantom inventory" problem," he said. "'Phantom inventory' refers to homes for sale that are not listed with realtors, and are therefore not included in the NAR's database. According to anecdotal evidence, a significant proportion of foreclosed homes are part of this phantom inventory."

4. Policy tools: Moody argues that in the face of the recession and rising unemployment, all those incentives to buy homes out there--including cheap mortgage rates, falling property values, and government initiatives--will be unable to prevent additional foreclosures and an even steeper home price decline. "With consumer confidence at rock bottom levels, all of the various plans designed to stimulate home sales will fall flat, while those actually willing to buy must meet more exacting mortgage lending standards," Moody said. "As such, sales will continue to flounder over coming months while what will, despite the best efforts of policy makers, be a sizeable wave of foreclosures will keep downward pressure on house prices."

5. Sliver of Hope? But while the months supply of existing homes increased--thanks to fewer sales--total housing inventory fell in January. "This is a positive at the margin for the housing market, though the overhang of supply that remains is still very large," economists at Goldman Sachs said in a report.

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