Home Sales Hit Best Level Since February 2007; Problems Ahead?

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Despite the rapid increase in mortgage rates and higher home prices, existing-home sales in August were better than expected, reaching their best level in more than six years.

The National Association of Realtors announced Thursday that total existing-home sales, which are completed transactions of single-family homes, town homes, condos, and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million units last month. In comparison, July showed an annual rate of 5.39 million units.

Economists only expected a pace of about 5.25 million units. The surprise beat was a sharp turnaround from June, which posted the biggest miss in a year. Existing-home sales are up 13.2 percent from the 4.84 million-unit level seen a year earlier. Sales are at their highest level since February 2007, when sales reached 5.79 million units. Total sales have now been above year-ago levels for 26 consecutive months.

Lawrence Yun, the NAR’s chief economist, cautioned that the real estate market might be experiencing a temporary peak. He explained: “Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions. Tight inventory is limiting choices in many areas, higher mortgage interest rates mean affordability isn’t as favorable as it was, and restrictive mortgage lending standards are keeping some otherwise qualified buyers from completing a purchase.”

Single-family home sales in August also gained 1.7 percent, to a seasonally adjusted annual rate of 4.84 million units, compared to 4.76 million units in July. On a regional basis, existing-home sales in the South increased 3.8 percent, and the Midwest posted a gain of 3.1 percent. Sales in the Northeast were flat, but sales fell 2.3 percent in the West.

Low inventory levels continue to support home prices. The national median existing-home price for all housing types was $212,100 in August, up 14.7 percent from a year earlier. This is the 18th consecutive month of year-over-year price gains and the strongest gain since October 2005. The last time this occurred was from January 2005 to May 2006, during the housing bubble.

Total housing inventory at the end of August edged 0.4 percent higher, to 2.25 million existing homes available for sale, representing a 4.9 month supply. Compared to last year, listed inventory is down 6.3 percent when there was a six-month supply.

Looking forward, home prices are set to slow their gains. “As the equity position of most homeowners continues to improve, some who have been on the sidelines will list their home for sale,” said NAR President Gary Thomas. “Most of those owners also will be buying another home, but higher levels of new home construction going into 2014, combined with some reduction in demand from less favorable affordability conditions, will help to moderate price growth to more sustainable levels.”

In the second quarter, 69.3 percent of new and existing homes sold were affordable to families earning the U.S. median income of $64,400, according to the National Association of Home Builders. That is down from 73.7 percent in the first quarter and is the first reading below 70 percent since late 2008.

Shares of home improvement names Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) both jumped more than 1 percent in Thursday morning trading. However, home builders D.R. Horton (NYSE:DHI) and KB Home (NYSE:KBH) both saw shares fall about 1 percent. Home Depot and Lowe’s have been among the best-performing names in the housing industry this year.

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