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At first glance, recent home-sales data looks awful, with July sales slumping to their lowest levels in more than 10 years. But a closer look raises questions about whether the housing market is actually as bad as it seems.

That’s the view of Aaron Smith, a senior economist for Moody's In a quick analysis following release of the July sales figures by the National Association of Realtors, Smith argues that the NAR data “overstates supply and understates demand.”

That’s not a dig at the NAR, just a note that three factors are influencing the figures.

First, says Smith, the government’s homebuyer tax credit caused many to buy homes sooner this spring than they normally would have. This caused a drop in sales that otherwise might have occurred in July.

The program, for sales under contract by April 30, provided an $8,000 tax credit to first-time buyers, and $6,500 for those buyers who traded up. A similar “pulling forward” of sales also occurred with the government’s Cash for Clunkers program last year. The NAR reported there were enough homes for sale in July to satisfy more than 12 months of demand, which is admittedly a disturbingly high figure.

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Second, Smith expects the number of homes for sale to gradually decline, which will help resolve the imbalance between supply and demand.

“Would-be sellers may be reacting to slower growth by not putting their homes on the market,” Smith says. “Fewer new listings could also reflect less pressure from foreclosures; at some point, fewer distress sales will cause new listings to drop back below sales, re-establishing the downward trend in existing-home inventory.”

Finally, Smith says Federal Reserve policy should continue keeping mortgage rates low, thus making it easier for more buyers to borrow. Ideally, this too would spur sales.

Of course, none of these explanations are meant to suggest the housing market is in terrific shape. But it should help reassure those worrying it may fall off a cliff.

The fact is a number of forces support housing demand over the long run: the population continues to grow, and most people prefer to own rather than rent. Plus, there are always young families, or those who have recently relocated, who want to buy a home sooner or later. Once they become homeowners, they never want to change.

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