US Existing Home Sales Unexpectedly Increased to an Eight-month High in January

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, February 24, 2011

02/23/11 - U.S. existing home sales rose 2.7% in January 2011 to 5.36 million annualized units, building on the 12.5% increase to 5.22 million annualized units seen in December 2010 (previously reported as 5.28 million). The increase comes as a surprise as market expectations were for sales to decline to 5.20 million in the month. On a more negative note, home prices declined 3.7% on a year-over-year basis in January, the largest annual decline since November 2009, as distressed home sales once again increased in market share.

The rise in existing home sales in January was the third consecutive monthly increase and the fifth in the last six months. Both main components posted gains in January, with sales of single-family homes up 2.4% in the month while sales of condos and co-ops rose a stronger 4.7%. The improvement was reasonably broad-based, with gains seen in the West (7.9%), South (3.6%) and Midwest (1.8%), while the pace of sales in the Northeast, the smallest of the regions, declined by 4.6%.

The median price of existing homes dropped 3.7% on a year-over-year basis, as distressed sales (which typically sell at a steep discount) rose to a 37% market share in January from 36% of total sales in December. In terms of inventories (which do not include houses in foreclosure or already foreclosed homes that have not yet been listed), the absolute number of homes available for sale fell for a fifth straight month, dropping 5.1% to 3.38 million units. This decline in inventories combined with the increased pace of sales resulted in the months’ supply of unsold homes on the market dropping to 7.6 in January from 8.2 in the previous month, the lowest level seen since January 2010 but still above the long-term average of 6.3.

While there is definite evidence of an upward trend in resale activity, the current pace of home sales remains well below the more ‘normal’ rate of 6 million annualized units and concerns about a sustained recovery in the housing market persist. The downward pressure on prices highlights the sizable supply overhang that has resulted from the flood of foreclosures into the market, and, with estimates suggesting that 27% of mortgaged single-family homes were under water as of the end of 2010, supply-side factors are not likely to improve drastically this year. On the demand side, today’s report noted that “buyers have been constrained by unnecessarily tight credit,” which, combined with the elevated unemployment rate, is limiting households’ ability to take advantage of highly favourable housing affordability therefore resulting in weak overall demand. These market imbalances are likely to persist in the near term, thereby likely restricting the pace of resale activity as well as new home construction. As a result, we continue to expect that residential investment will make only a very small contribution to economic growth in 2011.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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