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Experts: Don’t read too deep into February’s existing home sales drop

Buyer demand will keep sales up in coming months

Existing home sales came in lower in February, but experts warn against reading too deep into the drop, saying one month hardly sets a new trend.

Experts predicted the combination of pent-up housing demand and historically high consumer confidence will increase existing home sales in the months ahead.

“Strong consumer confidence in the housing market should keep existing home sales from sliding in the coming months, with homebuyers also seeing some relief in low inventory from the new construction end,” Trulia Senior Economist Cheryl Young said. “But gridlock at the lower end of the housing market will keep existing home sales well below pre-recession levels.”

This chart shows the steady increasing trend of existing home sales each year. Since 2010, home sales showed a steady increase each year.

Click to Enlarge

existing sales

(Source: Trulia)

And this increase won’t be letting up anytime soon, housing experts say.

“It’s important not to read too deeply into the one-month dip in existing home sales in February; the housing market is still running quite hot, and the next few months look to be as competitive and fast-moving as ever,” Zillow Chief Economist Svenja Gudell said.

Other experts agree, pointing out that Millennials are just reaching their prime home-buying years.

“Despite a monthly drop, existing sales remain above last year’s levels, due to a continually strengthening labor market and pent-up demand from both entry-level and trade-up buyers,” Quicken Loans Vice President Bill Banfield said. “Consumer confidence in the economy is also very high, which is a critical psychological element to consider as Millennials continue to enter their prime home-buying years.”

However, not everyone agrees that existing home sales will continue to rise.

“With little chance of a sustained rise in the number of existing homes for sale over the next year, sales are set to tread water even as the demand for homes rises steadily on the back of a strong labor market,” Capital Economics Property Economist Matthew Pointon said.

However, the root cause for the decrease in home sales is inventory, which continues to plague the market.

“There are plenty of buyers in the market, but they are unable to find the homes they want at the prices they can afford,” Senior Economist Joseph Kirchner said. “These affordability challenges are the result of inventory shortages, which leads to bidding wars, and rising mortgage rates, resulting in higher monthly payments.”

“We see the largest inventory shortages among the most affordable homes, which also saw the greatest decline in sales with homes under $100K down 15% from a year ago,” Kirchner said.

But housing inventory isn’t just a problem for homebuyers – it remains a problem for buyers and sellers alike. Sellers are hesitant to put their home on the market as they are unsure they will be able to find a new home once they sell theirs.

“Homebuyers are still plagued by low levels of resale homes on the market, and rising mortgage rates compound concerns for first-time and trade-up homebuyers gearing up for spring home buying season,” McLaughlin said.

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