Home sales jumped 9.4 percent in September, as first-time buyers rushed to take advantage of an $8,000 tax credit that's set to expire soon.
The gains from August were also aided by the affordability factor, as the median sale price for a previously owned home fell to $174,900. That leaves a key question for Congress: Will the recent stabilization of the housing market continue on its own, or do lawmakers need to extend that $8,000 credit, which currently covers homes purchased by Nov. 30? Congress is considering extending the credit and expanding it to people other than "first time" buyers.
The good news is that rising sales activity has reduced a glut of homes on the market. The for-sale inventory now represents a 7.8-month supply of homes, according to Friday numbers released by the National Association of Realtors (NAR).
That's a bit more supply than you'd see in a typical housing market, but it's the lowest since the early phase of the housing downturn in 2007. At the start of this year, the market had a 10-month supply of homes up for resale.
Still, many analysts say, the housing market's recovery is far from complete.
"Inventory levels have improved, but are still a long way from 'normal,' and equilibrium may be years away," economist Adam York at Wells Fargo Securities wrote in a report on Friday's numbers. "We would expect higher sales levels to persist through October and into November before collapsing in December if the credit is not extended."
Among the housing-market challenges:
• Unemployment has continued to rise nationwide, despite signs that the overall economy is growing again. Job loss can lead to loan defaults, and that can boost the fire-sale inventory of bank-owned homes.
• The decline in home prices has a mixed impact: It attracts buyers by making homes more affordable, but it also boosts loan defaults by some people who fall deeply "underwater" – with loan balances far exceeding the value of their home.
• The tax credit is also a mixed blessing. Ending it would hurt sales, analysts say. But it costs taxpayers money, and at some point it's important for the housing market to start functioning without overt prop-up policies.
The NAR tally of 3.6 million homes now for sale doesn't include "shadow inventory" of foreclosed homes that aren't yet for sale, says Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. Even the “official” 3.6 million inventory is 1 million higher than was typical in the first half of the decade.
"If the tax credit is not expanded and extended," Mr. Newport wrote Friday, annual home "sales will fall back to a rate of about 5.0 million during 2010." That would be a decent pace, but down from September’s annualized rate of 5.6 million sales.
Amid the challenges, what's most encouraging may be that interest rates for mortgages remain low and that the law of supply and demand seems to operate even in the housing market. As home prices fall, buying activity increases. According to some analysts, home prices will drop a bit more but then bottom out during the first half of next year.
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