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Surprise! Home Sales Spark Hope

Monday, February 25th, 2008

Investors found a sliver of hope to line the dark clouds of the housing slump on Monday.

Investors latched onto the National Association of Realtors’ upbeat tone Monday, sending the U.S. stock market higher in direct contrast to the stark data in the report, which said that sales of single-family homes and condominiums dropped by 0.4% in January to a seasonally-adjusted annual rate of 4.89 million units, the slowest pace on record since 1999. Despite this dire news investors seemed optimistic that the housing market may be bottoming out and that the increase in loan limits could lead to a rally in home sales toward the end of 2008.

The yield on the 10-year Treasury note jumped to 3.89% on Monday from 3.79% on Friday, as investors moved from the safety of bonds into equities, creating what has become a rarity in recent months–a boost in confidence in the equities market. The Dow Jones Industrial Average was also up to 12,486, a 106 point, or .85%, jump. The median price of a home sold in January slid to $201,100, a drop of 4.6% from a year ago, the fifth consecutive decline in home prices.

Existing-home sales in the Midwest rose 3.4%, but the median price of a home in the Midwest was $154,200, down 4.0% from a year ago. Existing-home sales in the Northeast fell 3.6%, although median home prices rose 3.1% from January 2007 to $270,800.

Investors found a knight in shining armor in Lawrence Yun, the NAR’s chief economist, who said there are still many potential buyers on the sidelines. “Subprime loans and other risky mortgage products have virtually disappeared from the marketplace, and over the past five months, this has been reflected in soft but fairly stable home sales,” he said.

Yun said he expects demand for homes to rebound later in the year as caps on the size of loans that can be backed by Fannie Mae (nyse: FNM - news - people ), Freddie Mac (nyse: FRE - news - people ), and the Federal Housing Administration are raised as part of the economic stimulus bill passed by Congress. But the problem of a housing glut still remains as inventories continue to build, putting downward pressure on prices. Total housing inventory rose 5.5% at the end of January to 4.2 million existing homes available for sale, representing a 10.3-month supply at the current sales pace, up from a 9.7-month supply in December.

But Global Insight U.S. economist Patrick Newport wasn’t so optimistic. “We think the credit crunch is hurting all corners of the mortgage market, and partly accounts for the 10% decline in sales in the past five months,” Newport said.

Newport said falling home prices may be the greatest hindrance to a recovery, but they are ultimately the solution as well. “In cities with falling home prices, homebuyers must weigh whether to buy an asset that is depreciating or rent instead,” he said. “We think that a growing share will choose to rent and wait things out. Over time, shifts in demand will cause rents to rise, house prices to drop, and home sales to turn around.”

But Newport thinks that turnaround is still months away.

Meanwhile, Lowe’s, the second biggest home retailer in the U.S., reported a 33.4% drop in profit, a result of the weakness in the U.S. housing market. But investors were expecting worse. As a result Lowe’s shares rose 4.1%, or 96 cents, to $24.55 at the close.