The pace of US home sales surged 7.4 percent in November, helping to bring down the inventory of for-sale homes to pre-recession levels.
November's robust performance was fueled, however, by an extraordinary factor – the anticipated expiration of a tax break for first-time home buyers. First-time buyers accounted for 51 percent of purchases tracked in the report on previously owned homes, released by the National Association of Realtors Tuesday.
Housing-market analysts say this raises questions about whether the housing market's nascent recovery will retain its momentum in 2010.
A case for optimism rests on several factors: Mortgage interest rates are low, Congress has extended the home buyers' tax credit through the first half of next year (it was set to expire at the end of November), and an improving job market next year could offset a continued high rate of mortgage defaults by households in financial trouble. While not auguring for a new housing boom, those forces could help keep the market on a path toward recovery.
But other factors suggest that the housing market still faces significant headwinds.
The biggest question mark is interest rates. The Federal Reserve has become a big investor in the mortgage market this year, creating demand for mortgage-backed bonds and thus pulling down the cost of loans for people buying homes. A 30-year fixed-rate loan averaged just 4.88 percent interest in November. But this month the Fed reaffirmed that it expects to complete its mortgage buying by the end of the first quarter of 2010.
Perhaps the Fed will be able to manage a graceful exit. But if mortgage rates jump as the Fed retreats, it will put downward pressure on home prices, as buyers can't afford to bid as much.
'Shadow inventory' still rising
Also weighing down the housing market is a large "shadow inventory," including homes in various stages of foreclosure. The record volume of foreclosures, highlighted in another report this week, shows no sign of stopping soon. In fact, "shadow inventory" continues to rise, according to a recent analysis by First American CoreLogic, which tracks the housing market.
Add this all up, and economist Mark Vitner says it's too early to say the housing market is normalizing.
"The inventory of unsold homes, for example, is reported to have fallen to just 6.5 months, which is the lowest since December 2006," he writes in a report for Wells Fargo Securities. "That seemingly normal level is primarily the result of the exaggerated sales pace for November."
To get a more accurate idea of how the market is doing, it's more useful to compare the current level of inventory with total sales volume for the whole year (about 5.2 million units) and not just one month, Mr. Vitner says. By that measure, there's what he calls a "more believable" 8.2-month supply of homes on the market as opposed to the 6.5-month supply based on the high level of sales in November. The shadow inventory of pending distressed sales adds another 3.3 months supply, according to First American CoreLogic.
All this leaves big uncertainties for 2010. The better the overall economy does, the better the chances that the housing market can work through the inventory.
Cause for optimism?
Chief economist for the National Association of Realtors, Lawrence Yun, predicted continued progress next year even with the withdrawal of government supports. "We expect a temporary sales drop [before] another surge in the spring when buyers take advantage of the expanded tax credit," he said in releasing the data Tuesday. That "hopefully will take us into a self-sustaining market in the second half of 2010."
He forecast that 4.4 million households will claim the tax credit before it expires. He also reported that the national median price for a previously owned home was $172,600 in November, little changed from October.
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