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No February Chill for Home Sales

The surprising surge in existing home sales for the month could ease market fears about the housing sector

At least one segment of the housing market continues to display resilience. A report from the National Association of Realtors released Mar. 23 showed sales of U.S. existing homes rising 3.9% in February to a 6.69-million-unit annual rate, from a revised 6.44 million pace in January (6.46 million previously). This is the third straight monthly increase in this figure.

The U.S. existing home sales surge in February defied the drop-back expected following the sharp over-performance in January, as well as inclement weather through much of the nation. The surge will certainly put a near-term cap on market fears of a moderating housing market, though all the January and February housing data are proving quite volatile, and we will need March and April data to form a better idea of what is really happening in the sector.

Looking at highlights of the report, sales of single-family homes rose 3.7% to a 5.880-million-unit rate, while sales of condos and coops rose 5.3% to a 0.810-million-unit rate. Sales were up in every region but the West, which was flat. As for inventories, the months' supply of homes on the market rose to 6.7 months from 6.6 months. The median sales price rose to $212,800, vs. $210,900 in January, but is down 1.3% year-over-year.

Wintry Mix

The NAR said the better weather in January was behind the improvement, and noted that March and April sales are likely to suffer from the poor February weather. Indeed, February strength was greatest in the Northeast and Midwest, where weather was mild in December and early January, vs. the sharp turn for the worse in weather in these regions in late January and throughout February. Since existing home sales are posted at the close, a weather-lag is not unexpected, though it proved more powerful than we and other economists assumed it would be.

Existing home sales are now sharply outperforming pending home sales, though they're in line with the strong trend in the Mortgage Bankers Assn. purchase index figures, if we ignore the temporary seasonal downswing in February that has already been partly reversed in March. The surge accompanies the 9.0% bounce in housing starts in February to leave a surprisingly solid mix of February housing data thus far.

The lean median price figure of $212,800 for February was close to expectations, though the market will continue to focus on the decline from a year earlier. The January and February figures mark the seasonal trough each year for these not-seasonally-adjusted data, and we expect a bounce in the median price figures in March and April, though often only via revision in the following month.

Show Us the Impact

We still expect new home sales to bounce 6.7% to a 1.0 million annual rate in February from a depressed January reading, and February construction spending to fall by 0.8% for the second month in a row. The real residential construction component of first-quarter GDP should drop at a 23% rate, following the 19.1% fourth-quarter rate of decline.

It's worth noting that all the housing data have been exceptionally volatile in the first quarter, but are thus far adhering to our ongoing assumption that the real estate market is stabilizing, with likely pass-through to the construction data by midyear. Though subprime mortgage fears in the bond market have translated to perceptions that the housing outlook is therefore weaker, we have yet to see evidence that there is going to be an observable impact in the housing statistics.

The only available "hard data" we have for March are the weekly MBA data, which have firmed considerably since the subprime stories started to rattle the markets—hardly confirming an obvious negative impact for the housing sector even though the outright bounce is a seasonal reversal of the February drop.

Englund is principal director and chief economist for Action Economics. MacDonald is director of investment research and analysis for Action Economics.

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