AROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: December Existing Home Sales
KEY DATA: Sales: 5.45 million units annualized (Down 16.7%)
 
IN A NUTSHELL:  “The crumbling of home sales in December simply reflects the unwinding of the surge to beat the feared loss of the first time buyers’ tax credit that hyped sales in the fall.” 

WHAT IT MEANS:  We knew it was coming, we just didn’t expect quite the huge drop in existing home sales.  Existing home sales posted their largest decline on record in December.  Nevertheless, that shouldn’t be taken as a sign that the housing market was going down the tubes again. As I and most other economists warned, demand had been hyped by the government’s threat to end the first-time home buyers’ incentive. That led to a huge jump in demand in October and November.  By the time December rolled around, most people who were thinking of buying had done so.   Additionally, the extension of the program until the late spring eased the pressure to buy right away.  The net result was a massive drop in sales.  The collapse was across the entire nation with every area but the West posting declines in the twenty percent range.  Still, I am not worried.  Demand was up by fifteen percent from December 2008.  In addition, prices are firming and they were up over the year in all four regions.  That says the situation is hardly as bleak as the headline December number would have you think. 
 
MARKETS AND FED POLICY IMPLICATIONS: This was a bad but hardly unexpected report.  Yes, the drop was a more than forecasted but when you are on drugs and they are taken away, the downer is usually quite painful.  That is what happened.  The government hyped the market and when they threatened to take away the incentives, the result was a roller coaster ride in demand.  So where do we go from here?  Sales are likely to wander around current or slightly higher levels until the next deadline comes into focus.  And then expect sales to pick up once again.  So the message is, don’t live or die on the one month movement of the housing numbers.  Watch the year-over-year trends and direction of housing prices.  If, as expected, sales slowly firm and prices creep up, that would indicate the market is continuing to heal.  But this report also makes it clear that while housing may be out of intensive care, it is not yet ready to leave the hospital.  That is what investors and the Fed will likely take away from the number.  That is, there is no need to panic but thoughts of a strong economic recovery should be tabled for a while.  

FROM: CHRISTOPHER J. BROWN, PRESIDENT

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