Existing Home Sales Rise 10% in October - Break out the Bubbly

The National Association of Realtors announced today that existing home sales for October rose 10.1% to a 6.1 million annual rate from a 5.54 million pace in September. This of course was done with massive government intervention including the $8,000 first-time homebuyers tax credit, super low interest rates, and FHA mortgage assistance. But before I get so cynical, let's look at the numbers.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – surged 10.1 percent to a seasonally adjusted annual rate¹ of 6.10 million units in October from a downwardly revised pace of 5.54 million in September, and are 23.5 percent above the 4.94 million-unit level in October 2008. Sales activity is at the highest pace since February 2007 when it hit 6.55 million.

The NAR's chief economist Lawrence Yun cheerleaded:

“Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November,” he said. “With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer.”

And in Bloomberg, Dean Maki, the chief US economist at Barkley's capital crowed "“It’s an impressive increase and shows a lot of pent-up demand for housing. Buyers have enough confidence to take the plunge. The housing market recovery will be a durable one.”

Yeah, right. Let's really dissect what's going on. The US housing market, which has always been propped up by the Federal government (think your mortgage interest deduction) has now been put on steroids. The government is supporting the market in three extraordinary ways:

1. It is paying people to buy houses. First it was the $8,000 first-time-homebuyer tax credit which was due to expire at the end of November. That deadline undoubtedly pushed a lot of people into a home purchase in October. Then, it was a continuation of the program with the $8,000 credit for first-time buyers and the $5,000 tax credit for exisiting homebuyers. Don't think the credit was a factor. It was huge. John Burns, a real estate expert believes that if the tax-credit ended, the real estate market would crash. That's not a robust housing market.

2. Tremendously low mortgage rates. Mortgage rates have reached record lows. The Federal Reserve has been buying up mortgage backed debt to bring down mortgage rates and it has succeeded. But once the Fed stops buying, which it will soon, rates will begin to rise.

3. The Federal Housing Association (FHA) has stepped in to take the role of sub-prime lender. The government agency has been insuring loans to buyers who have as little as 4.5% cash to put down. FHA backed loans have gone from 7% of the mortgage market in 2007 to over 25% in 2008. That number is expected to be over 30% in 2009. The problem is that the FHA is going broke. It's going to need to tighten its standards and get a bailout from the taxpayer in order to keep subsidizing home owneship.

So yes, the real estate market has improved but the improvement should be taken in context. Calling this a durable real estate recovery seems very premature and many analysts believe we may see another dip down in real estate before it gets better.