Confirming what many Street analysts had predicted, existing home sales fell in June, dropping slightly to 6.62 from 6.71 million units annualized in May. Although last month's number is down 9% from the all-time high, set a year ago, and down 6% from the 2005 average, the pace remains high by historical standards. Moreover, the good news is the cooling in housing demand has been gradual and orderly, according to Stephen Stanley, chief economist at RBS Greenwich Capital.

The good news stops there, however, as inventories of unsold homes continue to build and anecdotal reports from builders and realtors suggest that the market has significantly weakened in the last month. "Existing home sales would not reflect such a recent phenomenon because they tend to lag a bit (because they are recorded at contract closing)," Stanley said.

The inventories of unsold homes reached 3.7 million in June, a 6.8 months supply and the highest reading since 1997. To put this number in perspective, only a year ago there was a 4.4 months supply of homes in the market. However, although this figure appears to be a dark cloud looming over the housing sector, Stanley points out that it is easy to take an existing home off the market. Therefore, it does not constitute an inventory overhang as the excess of completed new homes for sale would.

Going forward, the concerns surrounding the housing sector are real, but they are not worth obsessing over. "Today's result may be relatively healthy, but there is at least some evidence that things are deteriorating more rapidly now," Stanley said. "I would suggest that market participants should keep a close eye on this, but investors have been so obsessed with the housing sector for months on end that such an admonition is surely unnecessary."

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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