Are Home Sales Stabilizing? 5 Things You Need to Know

After rebounding in February, sales declined again in March.

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After existing home sales demonstrated surprising strength in February, fingers were crossed for another increase last month. But when the National Association of Realtors released the March sales data Thursday, housing market optimists got their hearts broken--again--as the figures came in weaker than expected.

March existing home sales slipped 3 percent from the previous month and 7 percent from a year earlier. Meanwhile, the median home price fell 12 percent from March of 2008--to $175,200--but actually increased 4 percent from the previous month.

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

1. Flattening trend: Although he was disappointed that sales weren't stronger, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, says the report is encouraging nonetheless. "The big picture is still clear; the plunge in sales following the Lehman blowup is over," Shepherdson wrote in a report. "Sales are volatile month-to-month, but the trend appears to be flattening off. Single family sales fell at a 10.0% annualized rate in Q1, after a 17.4% drop in Q4. Even if sales remain at their March level for the next few months the Q2 number will be only -2%."

Economists at Goldman Sachs expressed a similar opinion. "Generally, [existing home sales] appear stable, albeit at an extremely low level," they wrote in a report.

2. February rebound? So what was behind that February bounce? Patrick Newport, a U.S. economist for IHS Global Insight, says the warmer-than-usual weather may have played a key role. "February 2009 was the eighth-driest and 27th-warmest February in the 1895–2009 record, according to the National Climatic Data Center. December and January, on the other hand, were colder than normal in the Northeast and Midwest," Newport wrote in a repot. "Swings in the weather, especially in the winter, will swing the housing numbers, and the seasonal adjustment factors will augment these swings."

3. Western kick: Amid plummeting prices on distressed and other properties, home sales in the Western United States--ground zero for the housing boom--have picked up recently. Thursday's report shows that home sales in the region increased 19 percent from March of last year. "The improvement in sales in the Western region is an encouraging sign that discounted prices, record low mortgage rates and various tax incentives are stimulating new demand," according to a report by Nomura Global Economics. "The recovery of sales in the most beleaguered region is strong evidence that the US housing market is on the mend."

4. Tug of war: Newport considers the existing home sales market a tug of war between cheap distressed properties, which push sales higher, and weak demand, which drags them lower. (The eroding labor market, low consumer confidence and tighter credit are among the factors limiting demand.) "Weak demand has been winning this tug of war in recent months, as existing home sales fell 5.3% in the fourth quarter of 2008, and 3.2% in the first quarter of 2009," he said. "We are not expecting sales to pick up until the third quarter of this year. By then, the economy will no longer be hemorrhaging jobs (although the economy will continue to lose jobs), the flow of lending will increase, housing prices will drop further, and first-time homebuyers will jump into the market in greater numbers to take advantage of a tax credit (worth up to $8,000) that expires December 1, 2009."

5. Home price floor: Shepherdson noted that the backlog of unsold homes is stabilizing as well, with the single-family inventory in the nine-month range. "Unfortunately at that level prices will continue to fall rapidly for the foreseeable future, though at least the rate of decline should not get any worse," he said. "The floor for prices is probably a late 2010 story."

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