U.S. Existing Home Sales Continue to Trek Upward

Existing home sales rose by 2.7% in January to 5.4 million, beating consensus expectations for a 1.1% decline. The details of the report were also good. Condo and co-op sales led the way, rising 4.7%, while single-family sales increased by 2.4%.

Foreclosures and short-sales accounted for 37% of total sales in January, up slightly from 36% in December.

Regionally, home sales declined in the Northeast (-4.6%) after a strong 16.1% gain in December. The West continued to lead the nation with a gain of 6.9% in January, followed by the South at 2.9%.

Month's supply of existing homes fell to 7.6 months from 8.2 months in December - its lowest level since December 2009.

Key Implications

A rebound in housing demand is essential to moving the housing market further down the road to recovery. Signs that uninfluenced by tax credits or other temporary incentives, housing demand is making a comeback are continuing to grow.

The rise in mortgage rates that has taken place over the last few months in combination with relatively high down payment requirements presents a challenge to the near-term rebound in home sales, but higher job growth and continued improvement in credit quality should help to overcome these obstacles.

While inventories are still relatively high and foreclosures continue to exert a strong influence on market activity, underneath the surface there are multiple reasons for optimism on the housing front. For one, mortgage delinquencies are declining strongly - as of the fourth quarter, the 90+ delinquency rate was down 1.4 percentage points from its peak. Secondly, there is considerable pent-up demand for housing. High youth unemployment has led young people to put off forming a new household over the last few years and slowed housing demand. As job growth picks up, this demand will re-enter the market, pulling up home sales and helping to absorb excess inventory.