Source: National Association of Realtors

Analysis

Existing home sales rose for the fourth consecutive month to an annualized pace of 5.24 million units. The monthly increase was the highest monthly rise on record. The 5.24 annualized pace of sales is now substantially above its 3 month average of 4.95, suggesting that existing home sales is steadily drifting upward from its cyclical low of 4.49 million unit pace set in January. This report was welcome news to the nation’s housing sector. The annualized monthly existing home sales pace has now broken through 4.5 to 4.9 annualized unit range that has existed over the past 12 months.

Foreclosure sales made up 31 percent of total existing home sales for July which was no change from June so that an increase in foreclosure sales does not explain the surge in July home sales. It appears that household confidence is climbing with regard to home purchases which is a positive development. Favorable housing affordability and historically low mortgage rates and a loosening of mortgage credit are the primary drivers of housing demand.

On the supply side, the months’ supply in July stayed flat at 9.4 compared to a month earlier. Normally, we would expect the months’ supply to drop given that the sales pace surged in July. However, inventories rose 7.3 percent from June to July to 4.091 million homes available for sale. That number could reflect an increase in foreclosure properties which does not bode well for future home values.

It is likely that we have seen the worst in the housing marketplace. It appears that the housing correction, with regard to home sales, is now underway. There are some positive influences for the housing sector. Mortgage rates are hovering near historic lows and are expected to remain at these levels for the remainder of the year. The fiscal stimulus package promises to have a positive impact on consumer confidence and spending patterns. And the foreclosure mitigation programs are expected to slow the pace of foreclosures, exerting downward pressure on housing supply.

However, on the down side, the economy remains in a recession, shedding a meaningful number of jobs on a monthly basis. Credit conditions also remain relatively tight, keeping households who want to purchase homes out of the purchase marketplace. And home values continue to fall as evidenced by the 15.1 percent drop in the median home price, year over year. Unfortunately, there seems to be a meaningful number of foreclosures still in the pipeline which is expected to exert downward pressure on home values for the remainder of this year and into 2010. On balance, it will take time for the housing sector to fully recover (i.e., a recovery in both home sales and home prices).