Existing home sales dropped in August despite slowing price growth and a positive turnaround in the share of sales to first–time buyers, following three months of consecutive gains.

Total existing home sales, which are completed transactions that include single–family homes, townhomes, condominiums and co–ops, fell 4.8% to a seasonally adjusted annual rate of 5.31 million in August.

Trouble? Not necessarily.

 “Housing activity remains solid, however, slightly less robust than months past with still-historically favorable, 30-year mortgage rates circa 4%,” says Lindsey Piegza, chief economist for Stifel Fixed Income. “Housing appears to be well positioned for a slow and steady upward trajectory should demand remain favorable.”

But, she says, rising rates amid a still-lackluster labor market could derail many potential buyers.

“The Fed is all too aware of the effects rising rates can have on the consumer's willingness and ability to afford a home purchase,” Piegza says. “In this environment, with 2% GDP and nonexistent inflation — as opposed to 4% growth and 3% inflation prior to the 2004 liftoff — even a 25bp hike can feel like 100bps.”

Matthew Pointon, property economist for Capital Economics, says what went into the disappointing August report will weigh on sales in the short term, but as lending recovers sales should pick up by the end of the year.

“The dip was enough to wipe out the gains recorded in both June and July, but sales are still up by over 6% compared to a year ago,” he says. “Existing sales have now recorded a positive annual growth rate for the past 11 months.”

Pointon says that following a surge in activity in recent months, some contraction in existing sales had been expected. Mortgage applications for purchases have been subdued of late, and the pending homes sales have fallen back from the high recorded in May. Furthermore, a lack of inventory is likely to have put a dampener on the recovery in sales, he says.

“But it is not all bad news. The economy is performing well, the labor market is creating jobs and banks have loosened their lending criteria,” Pointon says. “While mortgage rates are set to rise, affordability should remain favorable for at least the next couple of years. That should enable more mortgage-dependent buyers, particularly first-time buyers, to return to the market.

“Indeed, the NAR survey revealed that FTBs made up 32% of sales in August, up from 28% in the previous month. Inventory levels should gradually improve as housing starts rise and more households emerge from negative equity,” he says.