Home Sales Unexpectedly Drop in August: 5 Things to Know

A new report on the housing market shows sales gave back some of their gains last month.

By + More

After four straight months of gains, existing-home sales moved backward in August, falling 3 percent from July. The lackluster figures, released Thursday by the National Association of Realtors, follow a string of encouraging data that had pointed to stabilization in the housing sector. The drop in home sales disappointed economists, who had been expecting the report to show an increase in sales of about 2 percent. "This is an unpleasant surprise," Ian Shepherdson, the chief U.S. economist for High Frequency Economics, said in a report. "We await the next pending sales index with some trepidation."

[See Fed Moves to Maintain Low Mortgage Rates: 5 Things to Know.]

1. "Inconsequential": Some economists saw the decline as a logical correction after several months of strength in existing-home sales. "The setback reported is not terribly surprising given the large (+7.2%) increase reported for July and the strong advance in such sales that has [occurred] over the past half year," economists at Goldman Sachs said in a report. Still, only five of 74 forecasters correctly predicted the drop. For their part, economists at Nomura Economic Research—which did forecast a slide—said the drop appears "inconsequential." "Since 1973, sales have risen for five or more consecutive months just 13 times," they said in a report. "As with most other economic indicators, home sales move in fits and starts and this decline does not alter our judgment that sales have turned the corner towards growth though the pattern is likely to be uneven. Indeed, even after the small drop in August, single family home sales are up 10.6% from the January low, the best growth over any 7-month stretch since June 2004."

2. Inventory drop: Despite the slide in sales, the report did include some encouraging data for the housing market, as inventory fell by nearly 11 percent. At the current sales pace, the market has an 8.5-month supply of unsold homes. That's down from a 9.3-month supply last month. "The month supply at current sales pace indicator fell to its lowest level since April 2007," Mike Larson of Weiss Research said in a report. "So yes, the August figures are somewhat disappointing. But no, they don't derail the overall recovery thesis." But even though inventory levels are falling, foreclosures are expected to put more unsold homes on the market and hobble its recovery.

[Check out Housing Starts Reach 9-Month High: 4 Things to Know.]

3. Prices fall: Falling home prices deserve a great deal of the credit for the recent stabilization in sales. And that trend continued in August, as the national median existing-home price fell nearly 13 percent, to $177,700, from a year earlier. "While the deep decline speaks to the volume of the overhang of unoccupied housing, this does represent an improvement from -13.6% in July and a cyclical low of -17.5% in January, similar in spirit if not in precise numerics to the improvement evident in other indexes of home prices," Goldman Sachs economists said.

4. Tax credit extension push: Just as the home builders have done, NAR used its report to highlight the looming extension of the $8,000 first-time home buyer tax credit and to lobby for its extension. "The recent trend shows broad improvement in most of the country, but with an expected rise in foreclosures over the next 12 months we need to maintain a healthy level of ready buyers to absorb the inventory," Lawrence Yun, the trade group's chief economist, said in a statement included in the press release. "An extension of the tax credit is critical to preserve incentives for financially qualified buyers to enter the market." Senate Majority Leader Harry Reid, a Democrat from Nevada, has recently endorsed a bill that would extend the tax credit six months past its end-of-November deadline.

[See Will the $8,000 First-Time Home Buyer Tax Credit Be Extended?]

5. Fed acts to keep rates low: While an extension of the tax credit remains uncertain, home buyers got a clear boost from Fed Chief Ben Bernanke Wednesday. The Fed moved to extend its purchase of debt and mortgage-backed securities from Fannie Mae and Freddie Mac by three months. The purchase program is a key reason why mortgage rates have been holding at extremely low levels since the late fall of 2008. Conforming, 30-year fixed mortgage rates averaged 5.16 percent as of Tuesday, according to HSH.com. That's down sharply from 6.55 percent in late October of last year, before the Fed launched the program. By continuing to buy these securities for an additional three months, the Fed should be able to keep rates at attractive levels for a longer time.