The National Association of Realtors reported last week that existing home sales increased for the second month in a row to a 6.92 million-unit rate in March from February's downwardly revised 6.90 million-unit pace.

After rebounding by 5% in February, resales ticked up by 0.3% in March, which, although slight, is still higher than the expected 2% to 3% drop. All U.S. regions are modestly higher versus a year ago except for the West, which is down 12% year-over-year. Considering this breakdown, RBS Greenwich Capital said that it should not be surprising that people in the West are seeing more of a slowdown compared to the rest of the country.

Though the sales numbers are clearly firm, the inventory data continues to swell. There were over three million units on the market in March, which represents five and a half months' supply. "I want to emphasize that inventories of existing homes do not necessarily represent backlogs in the traditional sense because, for homeowners not compelled to move, putting one's house on or taking it off of the market is as simple as a phone call," RBS Chief Economist Stephen Stanley said. "Backlogs of existing home sales do not necessarily have to be worked off' in the same way that unsold new homes or stockpiles of consumer goods would." He explained that the rule of thumb is that six months' supply represents a good balance between buyers and sellers. This means that the backup in unsold homes over the past year has merely brought an overheated market back into balance.

New home sales

Meanwhile, the U.S. Commerce Department also reported last week that new home sales rebounded vigorously after plunging in February. Last month's new home sales reversed February's downward trend that was, according to RBS Greenwich, mostly weather-related. The figures in the West mostly drove these monthly swings. The flooding that happened earlier this year led to a 102,000 drop in sales in the West in February and an 84,000 rebound in March.

Aside from asserting that housing activity will slow more gradually than generally anticipated, Stanley said that the diminishing boost to consumption from housing wealth gains will unwind over time and not all at the same time. "If we are right about that, then it is difficult to see why the economy would decelerate as much or as fast as the prevailing view," Stanley said. "This is why we believe that the Fed is going to have to tighten beyond 5% in the second half of the year."

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

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