US Existing Homes Sales Unexpectedly Fell But Prices Rose in May

Existing home sales in the US dropped 2.2% in May to 5.66 million annualized units from the previous month’s 5.79 million (revised from 5.77 million). Market expectations had been for a strong increase to 6.12 million annualized units. Home prices, however, increased, with the median price climbing 2.7% relative to May 2009. 

Existing home sales in May fell from April’s upwardly revised surge, although they remained at relatively elevated levels (sales were up 19.2% on a year-over-year basis), likely reflecting the rush buyers looking to qualify for the Federal government’s homebuyers’ tax credit that required contracts to be signed by April 30, 2010 and to close by the end of June (sales of existing homes are counted at the time of closing). The monthly weakness was seen in sales of single-family homes (-1.6%) as well as condos and co-ops (-6.8%). Gains were seen in the West (4.9%) and South (0.5%), while activity held flat in the Midwest and fell significantly in the Northeast (-18.3%) following the outsized 21.1% rise in April.

The median price of existing homes increased by 2.7% on a year-over-year basis despite distressed housing sales (which typically sell at a 15% discount) making up 31% of total sales. In terms of inventories of unsold homes, as measured by months’ supply of unsold homes on the market, May’s figure fell to 8.3 from April’s unrevised reading of 8.4. The absolute number of unsold home for sale declined as well, falling 3.4% to 3.89 million.

Today’s existing home sales report for May is disappointing, although the National Association of Realtors noted that, “approximately 180,000 homebuyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process” and that many potential sales are being interrupted by issues with the National Flood Insurance Program. Without these delays, sales activity would likely have been notably higher.

With that said, the elevated level of recent activity likely relates to the homebuyers’ tax credit, and with this incentive now lapsed, there is considerable concern that the recent momentum seen in the housing markets will cede. Data so far for June show that weekly mortgage applications have fallen to their lowest levels in more than a decade, and homebuilder confidence dropped by its greatest amount since November 2008.

Against this backdrop, and with inflationary pressures expected to remain subdued, we continue to expect the Fed Funds target to remain in its currently stimulative 0.00% to 0.25% range until the fourth quarter of 2010.