Existing Home Sales Surge 12.3% in December

Are we seeing a rebound in Americans' demand for home buying? We could be, according to today's existing home sales report from the National Association of Realtors. Sales increased 12.3% to the annualized rate of 5.28 million. That soundly beat expectations of 4.88 million sales. December was the first month to exceed the 5 million annual sales pace since June, when the market was still benefitting from the home buyer credit. Is this an indication that sales are rebounding or is this just a blip?

First, here's the chart, which provides some perspective on just how much better December's sales were:

nar home sales 2010-12.png

As you can see, that's quite a surge. It's the most sales since May. In fact, the 12.3% increase in existing home sales was the largest since at least 1999. At 5.28 million, sales still remain far lower than the six to seven million sales that were common during the housing boom. But sales in the range of five million were pretty standard prior to that unusual period.

Since sales increased, it isn't surprising that inventory also declined. It was down 4.2% to 3.56 million:

nar inventory 2010-12.png

It's important to note, however, inventory may look artificially low due to banks' foreclosure slow down. As they try to fix their procedures and get their papers in order, less defaulted inventory is hitting the market.

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Despite the increase in home sales, the median sales price was about 1% lower than both November 2010 and December 2009 at $168,800. As mortgage interest rates rise, it will be harder for prices to increase even as sales do, since buyers' purchasing power will be diminished. This could be part of the reason why prices fell, even as sales rose and inventory declined.

So why the big increase in December? First, let's consider the words of Lawrence Yun, the NAR's chief economist:

December was a good finish to 2010, when sales fluctuate more than normal. The pattern over the past six months is clearly showing a recovery. The December pace is near the volume we're expecting for 2011, so the market is getting much closer to an adequate, sustainable level. The recovery will likely continue as job growth gains momentum and rising rents encourage more renters into ownership while exceptional affordability conditions remain.

To be sure, realtors must be psyched to see sales rise like this. And he is also right to note that sales have been recovering pretty steadily. But what's the reason for the big jump in December?

Again, because December is such a strange month, perhaps there was some rush to close by year-end that pulled forward some January sales. We'll know that was the case if we see a steep decline next month when we get January's numbers. Prior Decembers don't appear to show such a sense of urgency, however.

Another theory could be interest rates. Now that they appear to be rising, perhaps Americans who were mulling buying a home have decided to finally do so. Prices are obviously relatively low right now, but if interest rates rise, then purchasing power may decline even if prices continue to fall a little more over the next few years.

If December is an indication of stronger home buying demand going forward, then this is certainly good news for the industry. At this pace, 2011 sales would easily exceed five million, which would help to keep pace with foreclosures and other distressed properties that will continue to hit the market. Unfortunately, we won't know for sure if December's impressive performance will really become the norm until we have a few more months of data.