US Existing Home Sales Posted a Larger than Expected Decline in February

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Tuesday, March 22, 2011

03/21/11 - Existing home sales in the US fell 9.6% in February 2011 to 4.88 million annualized units, thereby retracing almost all of the gains seen in the last two months that pushed the pace of sales to an eight-month high of 5.40 million annualized units in January (previously reported as 5.36 million). The decrease was much larger than expected, with market expectations for sales to decline only to 5.11 million in the month. The pace of decline in home prices once again accelerated, with the median existing home price falling 5.2% on a year-over-year basis in February, which was up from 4.2% in January, to represent the largest annual decline since November 2009.

The decline in existing home sales in February was just the second monthly drop in the last seven months. Both main components saw sales fall in February, with sales of single-family homes down 9.6% in the month while sales of condos and co-ops fell by a slightly larger 10.0%.

The weakness was seen across all regions as well, with the Midwest (-12.2%), South (-10.2%), West (-8.0%) and Northeast (-7.2%) all posting sharp declines in the month.

The annual pace of decline in the median sales price of existing homes accelerated to 5.2% from 4.2% in January as distressed sales (which typically sell at a steep discount) rose to a 39% market share in February from 37% of total sales in previous month. 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 increased for the first time since August 2010, rising 3.5% to 3.49 million units. This rise in inventories combined with the slower pace of sales resulted in the months’ supply of unsold homes on the market jumping to 8.6 in February from 7.5 in the previous month.

Despite the monthly decline in existing home sales in February, the three-month moving average, which provides a better indication of underlying trends, rose for the sixth consecutive month, providing evidence of continued improvement in the resale market. Moreover, the pace of sales is 26.4% greater than the cyclical low seen in July 2010, and the average for January and February is an annualized 37.4% greater than the average pace of sales seen in the fourth quarter of 2010. With hat said, the pace of home sales remains well below the more ‘normal’

rate of 6 million annualized units. The continued downward pressure on prices highlights the sizable supply overhang due to the flood of foreclosures on the market, and these supply-side factors are not expected to show much improvement during this year. With the gradual pace of job growth keeping housing demand fairly muted as well, 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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