November 23, 2009 / 4:59 PM / 8 years ago

Home sales at 2-1/2 year high

<p>A home is seen for sale in the Washington suburb of Takoma Park, Maryland, October 27, 2009.Jim Bourg</p>

WASHINGTON (Reuters) - Sales of previously owned U.S. homes jumped last month to their highest level in more than 2-1/2 years, but a fall in an economic gauge was a reminder that recovery from recession would be patchy.

Sales of existing home sales surged a record 10.1 percent month-over-month in October, the National Association of Realtors (NAR) said on Monday, as buyers rushed to take advantage of a popular tax credit for first-time buyers that had been scheduled to end this month.

"Although the data are biased higher from policy measures, we do believe this sharp gain signals pent-up demand and a willingness to purchase homes, which is a good sign for the sustainability of the housing recovery," said Michelle Meyer, an economist at Barclays Capital in New York.

The housing numbers, which easily topped market expectations, helped drive up stocks, but a decline in the Federal Reserve Bank of Chicago's index of national economic activity offered a somewhat more sobering picture.

The White House said on Monday it was reviewing options to spur economic activity and job creation, but stressed any action would be taken in the context of the fiscal challenges facing the country.

Sales of existing home sales surged in October to an annual rate of 6.10 million units, the NAR reported, beating market expectations for a 5.70 million-unit pace and above September's 5.54 million-unit rate. The housing market is slowly mending after a three-year decline, which helped tip the U.S. economy into its worst recession in seven decades.

U.S. stocks snapped a three-day losing streak on the housing data, which eclipsed the report from the Federal Reserve Bank of Chicago showing its National Activity Index, a measure of the economy, slid to -1.08 from -1.01 in September.

The blue chip Dow Jones industrial average index hit a 13-month high before closing up 1.29 percent.

The Chicago Fed's National Activity Index's three-month moving average decreased to -0.91 in October from -0.67 in September, declining for the first time in 2009.

According to the Chicago Fed, a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood a recession has begun.

This development will likely feed into fears the economic recovery that started in the third quarter may lose some momentum once government stimulus wanes, given the high unemployment that is crimping consumer spending.

Analysts are cautiously hoping a sustained housing market recovery will help improve the psychology of households, which has been shaken by an unemployment rate of 10.2 percent, the highest in 26-1/2 years.

EXISTING HOME SALES BOTTOMED

<p>Sales of previously owned U.S. homes jumped last month to their highest level in more than 2-1/2 years, but a fall in an economic activity gauge was a reminder recovery from recession would be patchy.Graphic</p>

The NAR said its data on Monday, which showed broad-based gains in the largest segment of the housing market, was proof that the decline in purchases of existing homes had bottomed.

"Home prices are almost there. We are seeing less of a decline in house values," said Lawrence Yun, NAR's chief economist. He said the Realtors group expected strong sales for November, related to the federal tax credit.

Analysts, however, cautioned of some slowdown in the sales pace, citing a drop to 12-year lows in demand for home loans during the week ended November 13.

Distressed transactions accounted for 30 percent of sales last month and continued to weigh on home prices. First-time buyers made up a third of sales in October. A separate survey based on actual home sales showed first-time home owners accounted for 47 percent of sales last month.

The national median home price fell 7.1 percent from October last year, the smallest decline in over a year, to $173,100. Homes in foreclosure typically sell for 15 to 20 percent less than other homes.

Housing is healing and construction activity added to growth in the third quarter for the first time since 2005.

Recovery is being supported by the $8,000 tax credit for first-time buyers, low mortgage rates and falling house prices. The government this month extended the home buyers' incentive into next year and added a $6,500 credit for home owners buying a new residence. It had been due to expire on November 30.

Purchases by the U.S. Federal Reserve of mortgage-related assets have helped to push home loans down, boosting the affordability of house and aiding the sector's recovery.

On Sunday, the president of the St. Louis Federal Reserve Bank, James Bullard, said the U.S. central bank should keep its mortgage-related asset purchase program beyond a scheduled expiration in March.

The Fed, which cut interest rates to near zero last December, has committed to keep borrowing costs ultra low for an extended period of time.

In October, sales of single-family homes -- the biggest segment of the market -- rose 9.7 percent, while condominium and co-ops increased 13.2 percent. Sales were up in all four regions of the country. Prices rose in the Midwest, which had not seen the same boom as the rest of the country.

Prices declined in the other three regions. The rise in the Midwest was the first gain in any region since November 2008.

The supply of existing homes for sale in October fell to 3.57 million units from the previous month, NAR said. At October's sales pace, the supply equaled seven months of sales, the lowest in 2-1/2 years and down from September's eight months.

The inventory of homes on the market must fall below six months' supply to strike a balance between buyers and sellers, analysts say.

Additional reporting by Corbett B. Daly in Washington, Burton Frierson and Julie Haviv in New York; Editing by Leslie Adler

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