Existing Home Sales to Fall Below 5 Million in March

The existing home sales index for March is expected to fall 1.6% to a pace of 4.93 million units, following a surprising 2.9% gain to a pace of 5.03 million in the previous month.

February's advance halted a six-month trend of declining sales and was well-above expectations, but sales were still down 23.8% from one year ago, when the annual pace of sales was 6.60 million units.

David Sloan, senior economist at 4Cast, said he was "a bit suspicious" of the previous month's gain, and based on a similar rise in the data at the same time last year, he suggested some seasonal issues may have been responsible for the uptick.

After last month's release, NAR chief economist Lawrence Yun called the report "another sign that the market is stabilizing," but he said it was too early to speak of its implications for the longer term.

Sloan is looking for the index to fall to 4.80 million in March, largely based on a decline in the pending home sales index, in addition to the fact that the new home sales index continued falling in February.

The pending home sales index, which measures existing home sales that have been agreed upon but not yet finalized, saw a decline of 1.9% to its lowest number ever in the February report on April 8, suggesting that Tuesday's existing home sales index may follow suit.

Yet there is a wide range of expectations among the 70 economists surveyed. On the low end, some economists are looking for a pace as sluggish at 4.80 million, while the most optimistic forecasts are looking for a pace of 5.08 million.

Robert Stein, senior economist at FT Advisors, said the report will help determine whether February's rebound was the beginning of a new trend to mark stabilization, or merely a pause before even more declines.

Stein expects existing home sales to improve for a second month to a pace of 5.08 million. He said the combination of lower interest rates for mortgages, in addition to a lessening in the decline for new home sales, suggests enough buffer for existing sales to improve yet again.

New home sales fell by 1.8% in February, but the decrease to 590,000 was not as bad as expected, and the report included some upward revision to the January data as well.

In the medium-term, Stein expects further declines, saying it is still a few months early to call for normalization. After the advance he expects in Tuesday's report, Stein said the index will decline for a few months and bottom out just below a pace of 5 million.

Economists from Global Insight said there are three forces working against the U.S. housing market right now "First, credit remains tight. Second, the economy is losing jobs (300,000 private-sector jobs lost in the past four months). And third, house prices are falling in more places and at an accelerated rate."

The decline in house prices is related to the high overhang of inventories, added BMO senior economist Michael Gregory, who looks for a 2.2% decline to 4.92 million units. In February's report, the level of housing supply improved from a 10.2 month supply to 9.6 months, but that figure is still far above the longer-term median average of about 6 months.

Gregory said there is a "price deflation mentality among prospective purchasers," meaning that potential home-buyers are reluctant to buy a home as they perceive the price to decline even further.

Also to be released on Tuesday is the new OFHEO purchase-only home price index for February, which economists expect to fall by 1.4%, after a 1.1% drop in the previous month.

By Patrick McGee and edited by Cristina Markham