Existing Home Sales – Inventories Remain at Elevated Levels

Sales of existing homes rose 4.7% in December after two monthly declines, inventories remain at elevated levels, and the median price of an existing single-family home fell in December. The gain in home sales is noteworthy while other aspects of today’s report are much the same as we have seen for several months. The important take-away in this report is that inventories of unsold existing homes remain at elevated levels. Although mortgage rates have moved up slightly, they remain at significantly favorable levels (see chart 1).

Details of the existing home sales report:

  • Sales of all existing homes rose 6.5% to an annual rate of 4.74 million units in December, after two monthly declines
  • Sales of single-family existing homes increased 7.0% to an annual rate of 4.26 million units (see chart 2).
  • Regionally, sales of existing single-family homes held steady in the Northeast, rose in the Midwest (+4.4%), West (+13.9%) and South (+6.7%).

The median price ($174,700) of an existing single-family home dropped in December on a monthly basis (-2.9%) and from a year ago (-14.8%). The downward trend of home prices is due to the large inventory of unsold existing homes.

The seasonally adjusted inventory-sales ratio of existing single-family homes fell to a 9.6-month supply from an 11.4-month supply in November. This appears impressive at the outset, but digging deeper it appears that the November reading was probably an aberration because the quarterly averages for 2008 range between a 9.8-month supply and a 10.26-month mark. The inventory-sales ratio of unsold single-family homes climbed sharply in the first quarter of 2008 (10.27 month supply) and has held steady around this range (see chart 4). The median inventory-sales ratio is a 7.0-month supply of unsold homes. The average of this ratio was 10.24 in 2008 vs. 8.8 in 2007. Inventories of unsold homes need to shrink considerably more for home prices to stabilize.

Leading Index is on Our Watch List as Always

The Index of Leading Economic Indicators (LEI) increased 0.3% in December after a 0.4% drop in the prior month. The December gain is the first increase since June. Real money supply made the largest positive contribution followed by the yield spread. New orders of consumer and capital goods are assumed to have risen in December. Consumer expectations held steady and the remaining five components declined in December. On a year-to-year basis, the LEI dropped 3.65% in the fourth quarter, the largest drop in the current business cycle. The main message is that the economy remains in a recession in the near-term. At the same time, the positive contributions from money supply and yield spread warrant watching.