Existing home sales in the U.S. rose 10.1% in October, 2009. This is good news for the housing sector that has been hurt by an exceedingly large inventory of unsold homes and unprecedented rates of foreclosure.
The ability of the housing market to stand on its own, unaided by federal stimulus, will be tested very soon. The end is nearing for two federal policies that are credited with providing a boost to the housing market this year. The $8,000 tax credit for new home buyers was extended, but is scheduled to end in the spring of 2010. Secondly, the Federal Reserve, which purchased mortgage securities in an effort to keep mortgage rates low, has indicated that aid will soon cease as well.
The key will be to stabilize the number of unsold homes so the market can operate normally. Experts predict that the housing market has about six months to reduce inventory encouraged by government incentives.
The spring of 2010 may be the market’s best hope for a significant upswing in home values—the first in more than three years, says Michael Englund, chief economist at Action Economics. When the weather gets warmer in spring, home buyers are most active and housing prices often move higher.
While we don’t often equate higher prices with good news, a rise in home prices reflects equity growth. Because homes are a critical component of wealth, this will be a welcome trend for those of us whose wealth is represented largely by our homes.
Excess inventory has caused an imbalance in the housing market’s supply and demand balance. There are signs of improvement, however. A ‘normal’ inventory of existing home supply would be equivalent to 5 ½ to 6 months supply of homes. While October, 2009, saw a seven months’ supply of existing homes on the market, this was down from an eight month supply in September.
Beyond the inventory accounted for, economists and real estate experts are still speculating about how much “hidden supply” is out there waiting to come to market. This hidden supply is in the form of buyers who are waiting for better market conditions before listing and the many foreclosed homes that are in process and not yet back on the market. On a positive note, home builders are adding very little new supply, which is helping to stall further imbalance.