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Surprisingly strong January home sales seem to foreshadow an imminent market bottom, but economists say housing's not home free yet
Things weren't looking too sunny for the housing market on the morning of Feb. 27. Continuing troubles in the subprime lending sector pushed government-sponsored mortgage clearinghouse Freddie Mac (FRE) to declare it would tighten its standards on subprime loan purchases. The announcement came on the heels of profit warnings from several subprime lenders that have suffered from recent foreclosure increases among their customers.
But the sky seemed to clear when the National Association of Realtors (NAR) announced that sales of existing homes increased in January to the highest level in seven months. Total U.S. existing-home sales rose 3% in January to a seasonally adjusted rate of 6.46 million units from an upwardly revised pace of 6.27 million units in December. Wall Street had expected January home sales figures to hit only 6.24 million, according to Briefing.com. In 2006, existing home sales saw a record year-over-year decline of 8.4%.
Never mind subprime. The housing downturn was finally over. Or was it?
Though he expects existing-home sales to "gradually rise" this year, NAR Chief Economist David Lereah admits that unusually warm weather helped boost sales in January. "On the flip side, the winter storms that disrupted much of the country in February could negatively impact the housing market," Lereah said in a release.
January existing home sales were still 4.3% below the 6.75 million unit level recorded for the same month last year. By region, existing-home sales rose 5.6% in the West, 4.8% in the Midwest, and 2% in the South. In the Northeast, home sales were at a level of 1.07 million, unchanged from December. "The numbers were surprisingly strong," says Celia Chen, director of housing economics at Moody's Economy.com. "But I don't think this suggests that there's any strength underlying the housing market."
December data from Standard & Poor's S&P/Case-Shiller Home Price Indices, also released Feb. 27, show flat returns in some markets and a continued slowdown in growth in others. The indices are constructed to track the price path of typical single-family homes in 20 metropolitan areas. NAR says the national, median existing-home price was $210,600 in January, down 3.1% from January, 2006. (Standard & Poor's, like BusinessWeek.com, is a division of the McGraw-Hill Cos. (MHP).)
Slow job growth and rising interest rates will continue to hold back home sales and price growth in 2007, says Chen. Rising rates have already sent foreclosures skyrocketing, especially among subprime borrowers, who are finding it ever more difficult to make their mortgage payments.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.22% in January, up from 6.14% in December and 6.15% in January, 2006.
To protect borrowers from the "payment shock" that can occur when adjustable-rate mortgages increase, Freddie Mac plans to stop buying subprime loans with "a high likelihood of excessive payment shock and possible foreclosure." The company says it will stick to subprime, adjustable-rate mortgages that qualify borrowers at the fully indexed and fully amortizing rate.
"Lenders are getting nervous and pulling back," says Chen. "We're beginning to see the outcome of lax lending."
If delinquency rates rise faster than expected, or if the situation with subprime lending worsens, it could force more lenders to curtail lending. And that would be bad news for home sales, in spite of the recent display of strength.
Click here to see the U.S. cities with highest foreclosure rates.