What Tanking Home Sales Mean for the Recovery

Sales of existing homes dropped more than expected in January.

By SHARE

After a big drop in December, sales of existing homes fell again in January—a development that renewed concerns about the outlook for a real estate recovery. The National Association of Realtors reported today that sales of previously owned homes fell more than 7 percent in January from the previous month. This puzzled many economists, who had expected sales to be stronger in the wake of December's 16 percent month-over-month plunge. "This is a surprise," Ian Shepherdson, the chief U.S. economist at High Frequency Economics, said in a report. Today's existing-home sales report comes just days after the Commerce Department reported that new-home sales in January fell 11 percent from a month earlier. 

[See also 10 Cities for Real Estate Steals.] 

Although December's monthly sales plunge was deeper than January's, it was easier for housing market experts to explain. Uncle Sam's $8,000 first-time home buyer tax credit had originally been slated to expire at the end of November. Home sales increased in the run-up to this deadline as buyers scrambled to take advantage of the incentive. The effect was to pull many sales that would have otherwise occurred in December into earlier months. Sales in December, therefore, were weak because of the "hangover" that materialized after the tax credit's original deadline had passed. (The tax credit has since been extended and expanded; even current home owners are now eligible for thousands of dollars in incentives so long as they close a home purchase by the end of June.) 

[Check out Home Sales Tank: What It Means for You.] 

Altogether, home sales have dropped 22 percent from November's credit-induced peak. "The most likely reason for this is that the home buyer tax credit, initially set to have expired at the end of November, pulled transactions forward from December, January, and perhaps more months," economists at Goldman Sachs said in a report. While raw housing inventory continues to decline, the slowing sales pace has increased the months' supply of unsold inventory to 7.8. In November, the months' supply had dwindled to 6.5. 

"The pain of this hangover seems to be a little bit more than what I was expecting," says Mike Larson of Weiss Research. "But if there is anything positive in this report, it is that hangovers go away—and this one should as well." 

A handful of forces are working to bring buyers back into the market. First, home prices continue to decline. The national median price of an existing home fell 3.4 percent to $164,700, from December to January (although prices were flat on a year-over-year basis). Lower prices, of course, help to prod would-be buyers off the sidelines. At the same time, 30-year fixed mortgage rates remain very attractive at 5.11 percent for the week ending February 19. And while the unwinding of a Federal Reserve asset-purchase program should push rates higher, they are expected to remain in a range favorable for buyers. "The change in the market will bring some increase in interest rates, but we are expecting it now to be less than half [percentage point], and it could even end up being less than a quarter [percentage point]," says Keith Gumbinger of HSH.com. 

Buyers who close a home purchase by June 30 can also take advantage of the extended and expanded home buyer tax credit. But the credit's impact on future home sales remains unclear. "So far, the second credit appears to be having a minimal effect," Patrick Newport of IHS Global Insight, said in a report. "In the week ended February 19, mortgage applications to buy homes fell to their lowest level since May 1997, according to the Mortgage Bankers Association." 

[Check out Expanded First-Time Home Buyer Tax Credit Becomes Law.] 

Still, Larson expects lower prices to bring buyers into the market and increase sales as we move into the spring home-buying season. "If you are selling, it's not good news, if you are upside down on your home, [it's not good news], but if you are trying to just buy a home and put a roof over your head and you want to pay a reasonable price, you are looking at the cheapest homes in almost eight years here," Larson says. "That makes a compelling argument for stabilization."