Existing home sales continue to drift sideways, with a high rate of contract failures holding back a recovery. The National Association of Realtors reported a modest, 1.4% increase in existing home sales in October, creeping up to a seasonally adjusted annual rate of 4.97 million units. The increase recovers only part of the 3% decline in September. Although existing home sales are 13.5% above the 4.38 million unit level observed in October 2010, they have changed little in the nine months since February — bouncing around a 5 million unit annual rate.
Sales of single-family homes edged up 1.6% to a seasonally adjusted annual rate of 4.31 million units, while condominium and co-op sales were unchanged at 570,000 units. Across the regions, gains in existing home sales occurred in the West (jumping 4.4% to an annual pace of 1.19 million units), Midwest (rising 2.8% to 1.10 million units), and the South (up 2.1% to 1.94 million), but a decline in the Northeast (down 5.1% to 750,000 units).
The housing inventory continued to trend down, falling 2.2% with 3.33 million existing homes available for sale at the end of October. At the current sales level, this represents an 8.0-month supply — an improvement on the 8.3 months in September and 10.6 months recorded in October 2010.
Contract cancellations rose sharply, with 33%of NAR members reporting contract failures in October. This compares to 18% in September and only 8% a year ago. Contract cancellations are typically the result of declined mortgage applications or the appraised value of a home coming in below the negotiated price, which typically results in a rejection during the loan underwriting process. The NAR advise that “we should be seeing stronger sales”, but the sales recovery is being held back, as “many people who are attempting to buy a home are thwarted in the process.” Problems with the appraisal process and the very tight lending conditions have been a recurring theme reported by the Realtors over the past year.
The relatively flat result for existing home sales in October also reflects waning interest by investors. Investors’ share of existing home sales edged down in October, with investors purchasing 18% of homes, compared to 19% in September and 22% in August. As suggested last month, investor sentiment has greatly influenced existing home sales over the past year, with weaker home sales corresponding to a decrease in investor share (and vice-versa).
The falling investor share is likely to be a response to a declining number of distressed homes for sale. Investors typically prefer undervalued distressed homes that they either turn-over for a short-term profit or convert to rental housing. The share of distressed sales slipped to 28% of existing home sales in October, from 30% in September and 34% in October 2010. The NAR note that, “In some areas we are hearing about shortages of the foreclosure inventory with multiple bidding on the more desirable properties.”