Home Sales Weaker, but Still Beat Fears

Existing home sales were weaker than expected in June, running at a pace of 5.75 million, compared to forecasts for a pace of 5.86 million. While weaker than expected, the sales pace and the underlying data within the report are probably no worse than what was feared.

It is notable, for example, that the inventory of unsold homes fell for the first time in six months, falling 182,000 to 4.196 million. No metric is more important on the housing front than the inventory figure, given then supply and demand imbalance.

Sales prices increased during the month, probably a function of the reduction in lending to subprime borrowers, although also a sign that some areas of the country -- New York stands out -- continue to see very little if any erosion in home prices.

If the housing market is to recover from its current woes, inventories must fall. The amount of unsold existing homes is currently running about 2 million above normal, at 4.196 million. For new homes, the figure is about 200,000 above normal. Hence, the biggest problem lies in the market for existing homes. Inventories of new homes can be put under control much more easily than for the existing home arena, given that the inventory of unsold new homes can be controlled by cutting production.

The inventory-to-sales ratio remained high at 8.8 months, the same as in May (revised downward from 8.9 months) and a 15-year high.

It is possible that these latest figures reflect the pulling of some homes from the resale market. This happened last fall and in the early winter, a seasonably slow period of sales activity compared to the spring, a time when sellers put their homes up for sale in droves. Time will tell on this front, but a steady and deep decline would suggest that more is at play than homes being pulled from the market. The sales data will provide clues.

Sales seem likely to be relatively stable in the months ahead, given what is known about mortgage applications, which have been in the midst of a meaningful uptrend over the past fourteen weeks. It would be extraordinary if sales were to weaken much more in the face of rising mortgage applications.

Keep in mind that existing home sales reflect mortgage applications two to three months prior, given that sales are reported at the closing of a home sale. Hence, today's data reflect mortgage applications filed as far back as March, before the latest uptick in mortgage applications.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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