By Madhura Karnik

Existing home sales declined marginally for February although remained relatively higher than the sales reported the same time last year, a sign that the housing market continues to improve.

The National Association of Realtors (NAR) reported Wednesday that the existing home sales fell 0.9 percent to a seasonally adjusted annual rate of 4.59 million in February. NAR also upwardly revised the January sales numbers to 4.63 million from the previously reported 4.57 million, an indication why sales slipped in February compared to the previous month defying estimates.

But, the good news is that sales are 8.8 percent higher than what was reported in February 2011. Historically, home sales have been the weakest in winter. But, given this year’s warm winter, buyers have shown considerable activity in the worst performing season.

Economists are also attributing the decrease to the seasonal adjustments in data. This year February had one extra day, so smoothing the data would have impacted the sales.

Although sales continue to show positive trends, the housing prices are still discouraging. NAR reported that home prices were up 0.3 percent from February 2011. However, this increase is not as encouraging economists said.

“Prices are continuing to fall,” said Dean Baker, chief economist and co-director at the Center for Economic and Policy Research, a liberal minded think tank. “We will probably see another 4-5 percent decline over the course of the year.”

According to Kevin Harris, chief economist at Informa Global Markets, it will take at least nine to twelve months for the home prices to stabilize and for sales to ramp up.

“If prices keep falling, people may not sell due as they wait for prices to increase,” said Harris.

Apart from home prices, interest rates are also affecting home sales. If interest rates continue to rise even by a small margin, it will affect buying patterns. Last week, the average contract interest rate for 30-year fixed-rate mortgages increased to 4.19 percent from 4.06 percent.

Some economists like Lance Roberts of StreetTalk Advisors, believe that homeowners now think they are entitled to very low interest rates due to trends in recent years. So, even a small upward spike would make them change plans of postponing or not borrowing for buying homes.

“As interest rates rise, prices will be forced lower as buyers buy payments not houses,” said Roberts.

The impact of this increase in interest rates was already felt in last week’s refinance volume and purchase applications. The refinance applications activity decreased to 73.4 percent of total applications, the lowest since July 2011, from 75.1 percent the previous week.

The drop in refinance activity would further lead to accumulation of more toxic inventory in the market, in effect driving down house prices.

What the housing market needs is a strong economy and an even stronger consumer sentiment. With job numbers bringing in a positive outlook, consumer confidence is regaining ground. But, this progressive stride should continue for it to have an impact on the housing market.

“The economy needs to be in good shape and the job growth should be persistent,” said Harris about the future of the housing market.

The next few years will be crucial for the markets. Even if the economic outlook is upbeat, it will easily take two to three years for the housing market to pick up steam.

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