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Why Declining Existing Home Sales Are Considered a Positive Sign

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Feb. 23 2018, Updated 7:40 a.m. ET

January existing home sales down 3.2%

The United States National Association of Realtors (or NAR) releases a monthly report on existing home sales (ITB). This report consists of information about the trends in housing inventory, total housing inventory, median home prices, and the 30-year mortgage rate. The outlook for the housing market (REM) and demand projections can be formulated using existing home sales data.

As per the February report from NAR, existing home sales have decreased 3.2% to a seasonally adjusted annual rate of 5.4 million homes in January as compared to a downward revised 5.6 million homes in December. This is the largest annual decline for existing home sales in over three years. The average commitment rate for a 30-year mortgage increased for a fourth straight month to 4.03% from 3.95% in December.

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Not all declines are disappointing

Lawrence Yun, the chief economist of NAR, said that the primary reason for the decline in existing home sales was the shortage of housing inventory. He has cited inputs from realtors across the nation that indicated improved buyer traffic, which combined with lower inventory, is pushing prices higher. Improving economic conditions could help increase the closing rate despite the rise in prices.

Price and inventory trends in the housing market

House prices in the US have increased for 71 consecutive months (year-over-year). The median home price (FTY) across the US in January was $240,500, up by 5.8% from the same period in the previous year. The percentage of first-time buyers has fallen from 32% in December to 29% in January. The unsold inventory has remained below the five-month supply mark at 3.4 months, which indicates a tight housing (EQR) market.

There are concerns about rising mortgage rates, but realtors are hopeful that wage hikes and tax cuts could help offset the higher costs. Home prices, however, are increasing and supply is decreasing, which indicates a tighter market for the housing (IYR) sector. Overall, the housing market looks positioned for continued growth with help from an improving economy.

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