Home sales rebound to early-2007 level
Market still propped up by tax credits

By Dina ElBoghdady
Washington Post Staff Writer
Tuesday, November 24, 2009

Economists and policymakers got what they were looking for Monday: a clear uptick in the housing market. The catch is, few believe it's sustainable.

The National Association of Realtors reported that sales of existing single-family homes, townhomes and condominiums in October surged to a seasonally adjusted annual rate of 6.1 million units from 5.54 million in September -- making last month the strongest since February 2007. Sales were up 23.5 percent from last October.

Every piece of housing data is scrutinized these days because it was primarily the housing market that derailed the U.S. economy, and its recovery is key to restoring economic vitality.

Low home prices, federal programs that helped push down interest rates and a temporary $8,000 federal tax credit mostly for first-time buyers have all played a role in boosting home sales in recent months. As sales picked up, the excess supply of homes started shrinking and prices began stabilizing.

But real doubts linger about whether these gains can be maintained, especially if unemployment continues to rise and government intervention is curtailed. The federal "cash for clunkers" program boosted auto sales, for instance, but only temporarily. And many economists forecast weak growth once the government's broader economic stimulus spending winds down.

On Tuesday, Federal Reserve leaders are expected to project continued high levels for the unemployment rate through at least 2011 when the Fed releases its forecast for future economic growth.

"The number one worry is the labor market," said Adam York, an economist at Wells Fargo Securities. "We're still losing jobs at a pretty hefty clip. . . . Without income, no one's going to be buying a house or anything else."

On Monday, the Realtors group singled out the tax credit for the surprisingly strong October sales. That credit was due to expire Nov. 30 and buyers rushed to get in under the wire. It was recently extended to April 30 and expanded to include repeat buyers, who will be eligible for a $6,500 refund starting Dec. 1.

Monday's report showed that every region in the country experienced an increase in sales, led by the Midwest, where sales rose 14.4 percent. The South, which includes the Washington region, had a 12.7 percent increase, followed by the Northeast at 11.6 percent and the West at 1.6 percent.

Nationally, sales have risen in six of the past seven months, with August the sole exception.

"Were the October numbers goosed by people thinking the home buyers' tax credit will go away? Yes," said Thomas Lawler, an economist and housing consultant. "Is it likely we'll see one more very strong home-sales number in November? Yes. . . . But is it sustainable? Probably not."

Even Lawrence Yun, the Realtors group's chief economist, conceded that a sharp rise in October and November sales cannot hold in the coming months.

"A measurable decline should be anticipated in December and early next year before another surge in spring and early summer," Yun said in a statement. He attributed the renewed activity next year to the typical start of the home selling season supported by the continuing tax credit.

But other economists doubt that the tax credit with prompt another jump in sales. Many of the prospective buyers originally targeted by the credit have taken advantage of it already, while others are unlikely to do so because employment conditions have weakened.

"The tax-credit program has no doubt turbocharged the market," said Michael Larson, a housing analyst at Weiss Research. "But going forward, it's not going to be any great rebound but an anemic one. It's going to be three steps forward and two steps back."

Monday's report also showed that the national median home price fell 7.1 percent, to $173,100, in October compared with a year earlier, the smallest drop since June 2008.

With prices low, bargain hunters snapped up deals, particularly aggressively priced foreclosures, and the supply of homes at the end of October fell 3.7 percent, to 3.57 million, the lowest level in more than 2 1/2 years, the report said. If sales were to continue at the current pace, it would take seven months to sell them. Six months is generally considered to be healthy.

Larson said the sales frenzy has helped remove 1 million existing homes from the market. The number of newly built homes has also plunged as builders have refrained from adding homes to the market.

"That's what you want to see," Larson said. "That is what is clearly foretelling an eventual turn in pricing for the better."

But as is often the case with housing, the good news is intertwined with the bad, demonstrating just how fragile the market is.

Government data released last week showed that home construction took an unexpected tumble in October, falling to its lowest level in six months. Housing starts fell 10.6 percent, to an annual rate of 529,000.

Other rude surprises may be on the way. One unknown is how many more foreclosures will hit the market in coming months as loan modifications for troubled borrowers fall through and lenders start marketing foreclosures that they had not previously put up for sale.

That "shadow inventory," said Patrick Newport of IHS Global Insight, "is still a large number."

Staff writer Neil Irwin contributed to this report.

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