Existing Home Sales and Home Prices Up

Existing home sales surged in October to the highest level in more than 2-1/2 years. The National Association of Realtors reported that existing home sales rose 10.1% last month to a seasonally adjusted annual rate of 6.1 million units, up from the downwardly revised rate of 5.54 million in September.

Also, the S&P Case-Schiller composite index rose slightly on a seasonally adjusted basis. The country was roughly split between areas where home prices increased during the month and areas where housing values continue to decline.

Sales activity is the highest since February 2007, when the annual rate was 6.55 million. The gain was likely due to an influx of buyers looking to take advantage of an $8,000 tax credit the Obama administration made available for qualified first-time home buyers.

The tax credit was scheduled to expire at the end of November, but it has been extended to April 30 and expanded to include more home buyers.

Total existing home sales rose the most in the Midwest, surging 14.4% in October to a pace of 1.43 million. That’s 28.8% above a year ago. In the Northeast, sales rose 11.6% to an annual level of 1.06 million; sales in the South jumped 12.7% to 2.30 million; and the West saw the smallest increase, up 1.6% to 1.31 million.

It is encouraging to see home prices rise as well. If this continues, some of the people in underwater houses (meaning with a mortgage more than the value of the house) might just see the flood recede and regain some positive equity in the house. This would greatly reduce the number of foreclosures in the future. It would make it an economically rational thing for people to pay their mortgages again.

All in all, the increase in home prices is good news, but it is coming with a big price from the Federal Treasury. The risk of a renewed downturn in the second quarter of 2010 is very big. If that were to occur, it would mean more pain for the mortgage complex.