Falling House Prices Reflected in Soft Economy

The weakness in May existing home sales was broadly based. Single-family home sales fell 3.2 percent to a seasonally adjusted annual rate of 4.24 million, while condominium and co-op sales were down 8.1 percent to 570,000.

Across the regions, existing home sales in the Midwest were down 6.4 percent to 1.02 million units; the South fell 5.1 percent to 1.85 million units and the Northeast slipped 2.5 percent to 770,000 units. Sales in the West remained unchanged at an annual pace of 1.17 million units.

One positive sign from National Association of Realtors report, the parallel practitioner survey indicates that the share of distressed homes - sold at a discount - dropped to 31 percent in May, from 37 percent in April and 39 percent in March. Further declines will help to stabilize house prices and to restore confidence in the housing market.

However, the practitioner survey also indicated that investors' share of total sales, which had been rising steadily and supporting home sales earlier in the year, dropped back in May to 19 percent, from 20 percent in April and 23 percent in January 2011. Increasing caution by investors is likely to have contributed, in part, to May's decline.

NAR pointed to temporary factors holding back the market in May, noting spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to softer figures for actual closings in May.

However, with oil prices easing in May and June, NAR suggested the pace of sales activity in the second half of the year is expected to be much stronger than the first half.

Not being too optimistic, you can anticipate existing home sales will lag broader economic growth. Indeed, economic activity is projected to remain sluggish during the second quarter before bouncing back at an appreciably stronger rate of growth in the third. Expect the level of existing home sales to remain relatively flat in the second and third quarters, before strengthening by the fourth quarter of 2011.

- Courtesy of NAHB