U.S. Existing Home Sales Rise Unexpectedly

Existing home sales unexpectedly rose by 2.9% in February, sending the annualized level to 5.03 million units. Expectations had been for the level of sales activity to moderate slightly by 0.6% to 4.86 million units from 4.89 million units in January. The monthly increase reflected gains in both single family homes (2.8%) and condos/co-ops (3.7%).

The pick-up in sales helped send the number of unsold homes on the market down by 3% to 4.034 million units. Measured in terms of months of supply, inventories remained high at 9.6, although this is down from the 10.2 that prevailed in January. After rising steadily through most 2007 and hitting a near-term peak in October of 10.5, inventories have subsequently trended modestly lower.

The pick-up in sales and moderation in inventories did not prevent housing prices from continuing to decline. On a year-over-year basis, the median sales price for existing homes dropped 8.2% compared to a 5.3% decline in January.

The modest rise in existing home sales in February still left the level activity so far in the first quarter down an annualized 3.2% relative to the fourth quarter. The attendant downward pressure on broker commissions will weigh on residential investment in the first quarter. In fact, we are expecting another sizeable double-digit decline in this component that will subtract close to a full percentage point from overall GDP growth in the first quarter.

With the level of inventories of unsold homes remaining high, albeit moderating, we expect construction activity will be reduced further during the course of this year. Thus, residential investment will continue to subtract from the pace of activity, although with the level of activity already very low the magnitude of subtraction will start to ease.

The continuation of recessionary conditions in the housing market is expected to be a factor that will keep the Fed cutting Fed funds, which we expect to be lowered a further 75 basis points to a near-term low of 1.50% by mid-year.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.