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October sales gains lift hopes for housing market, if not for overall economy

November 23rd, 2009 12:00 am by Assocaited Press

WASHINGTON (AP) -- First-time buyers seized on an expiring tax credit, low mortgage rates and falling prices to boost home sales in October to their highest level in 2 1/2 years.


Home sales are now nearly 37 percent above from their bottom in January, though still 16 percent below their peak in 2005. At the current sales pace, there's a modest seven-month supply for sale. In some areas, there are bidding wars.


The report Monday from the National Association of Realtors pleased investors on Wall Street. And analysts said the homebuyer tax credit, which has been extended, will help sustain the housing market next year.


Yet the overall economy is likely to benefit only slightly from higher home sales. Too many factors are weighing on the fledgling recovery.


Home construction is weak. Foreclosures are rising. Job creation is slow. And consumers remain reluctant to spend.


The Realtors group said resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from a downwardly revised pace of 5.54 million in September. It was the biggest monthly increase in a decade, and far above the 5.65 million pace economists expected, according to Thomson Reuters.


Investors seized on the better-than-expected home sales, along with a falling dollar, to snap up stocks. The Dow Jones industrial average and other stock indexes rose more than 1 percent in early afternoon trading.


Reduced prices combined with federal programs to lower mortgage rates and bring more buyers into the market are driving the housing market recovery. The median sales price was $173,100, down 7 percent from a year earlier and off roughly 2 percent from September.


Many experts predict prices will hit a new low next spring, perhaps falling another 5 to 10 percent, as more foreclosures get pushed onto the market. The government has tried to counter that trend by offering a tax incentive for first-time buyers and by keeping mortgage rates around 5 percent since the spring.


The tax credit of up to $8,000 for first-time owners was originally set to run out on Nov. 30. But Congress renewed it earlier this month and broadened its reach. People who have owned their current homes for at least five years can now claim a tax credit of up to $6,500 for a home purchase. To qualify, buyers must sign a purchase agreement by April 30.


The Realtors' report on October home sales reflects offers made before buyers knew the tax credit would be extended.


"The incentives really did get people to go out and buy," said Wells Fargo economist Adam York. "The question is: What does the trend look like when the credit is over with?"


Home sales are likely to drop over the winter as buyers hibernate for a few months without the looming tax credit deadline.


The new deadline means "we're going to see some good activity coming out of the spring," said Pat Lashinsky, chief executive of online real estate brokerage ZipRealty Inc.


But the government support can't last forever. For example, the Federal Reserve is likely to curtail its effort to push down mortgage rates next year. If rates then rise too high, it would make home purchases less affordable and dampen demand.


"When we do kick those crutches out from under the housing market, will it be able to stand on its own?" said Mark Fleming, chief economist with real estate information company First American CoreLogic. "It's really hard to tell."


Other economists cautioned that consumer spending and job creation remain too weak for the economy to mount a strong recovery.


"The increase in home sales will provide a welcome boost to housing-related consumption and employment although, unfortunately, not by enough to prevent a prolonged period of sluggish consumer spending and labor market weakness," Paul Dales of Capital Economics wrote in a research note.


But for homebuyers with cash and access to credit, falling prices and low mortgage rates have proved irresistible.


Joey Wilson, 53, and her husband made unsuccessful offers on 20 Las Vegas homes since midsummer before closing on a four-bedroom, $136,000 home this month.


"It's insane," said Wilson, who relocated from Kentucky. "I've never seen a market like this before."

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