Are we seeing improvements in the housing market or is it just a dead-cat bounce? This week we discuss existing home sales, interest rates, housing starts, building permits, and builder confidence. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free Existing Home Sales: Month-Over-Month Improvement, Down on Year According to the National Association of Realtors, December existing home sales were up 12.3% over November to a seasonally adjusted annual rate of 5.28 million. This was a big increase over November’s 4.70 million but is still down 2.9% over December 2009’s 5.44 million annual pace. Inventory was down in November to an 8.1 month supply vs. 9.5 month supply in November. The big jump over November existing home sales in December is probably a result of rates hitting cyclical lows in November and the sales coming through in December. The inventory increase in December in the year-over-year horizon is cause for concern though. While I wouldn’t expect this type of recovery to show every month an improvement over the previous month and year, I would have expected a smaller increase in inventory over last year. Overall I believe this was a healthy report showing people were motivated by the low interest rates an improved economic activity. Interest Rates Stagnate Interest rates are finally stabilizing according to Freddie Mac’s interest rate survey. The 30-year fixed rate increased slightly from 4.71% to 4.74% last week. The 15-year fixed rate increased as well from 4.05% to 4.08%. A year ago the 30-year and 15-year were 4.99% and 4.40% respectively. Recent reports showing that inflation was in check did little to change the bond market and subsequently interest rates. With the price of oil rising, inflation may be ready to rear its head in the near future. I think we go up from here on rates with some small declines. I doubt we’ll be discussing rates below 4.5% in 2011. Builder Confidence: Going Nowhere The National Association of Home Builders (NAHB) released its Housing Market Index showing builder confidence unchanged in January. The index registered its 3rd consecutive 16 in January. Anything under 50 is considered unhealthy for the market. The West saw an improvement of 4 points to 15. The Midwest was up 1 point to 14. Meanwhile the Northeast and the South declined 2 and 1 points to 20 and 17 respectively. The survey which the NAHB has been performing for 20 years has been under-performing expectations over the last few months as builders have been particularly bearish on financing conditions. The home builders are in a quandary; even if people were more optimistic and demanding new housing they couldn’t get the financing to build it. I’ve stated before that while this is bad for the home-building industry, it is healthy for the housing market’s ability to absorb excess inventory. Housing Starts Disappoint The Census Bureau reported that housing starts declined in December 4.3% over November to a seasonally adjusted annual rate of 529,000. Single-family starts were down 9% in December to an annual rate of 417,000. On a better note, building permits were up 16.7% in December over November to an annual rate of 635,000. This represents two entirely different stories. We’ve already talked about stagnant builder confidence. Housing starts remain extremely weak though permits are up. Does this mean we’ll see an improved year in new home construction? I think so. The percentage increase will likely look good this year but will be off some pretty low numbers. Again good for absorption because the existing stock needs to be worked off the books. Parting Thoughts I’ve been hearing rumors about a foreclosure tsunami that is supposedly approaching over the next few weeks. While I’m betting this is largely hearsay, there is some backlog that will be accelerated through the system. This is due foreclosure postponement from the foreclosure robo-signing issue which had taken place in Q4 2010. So expect a bump but not a tsunami. Lastly, one quick note on supply. I’m seeing a lot of reporting on the shadow inventory being bigger than previously thought. My focus is on the current supply (what’s on the market now) and this seems to be improving. I think we all know the shadow inventory is certainly there. Unfortunately no one can predict when this will all come on the market, but I think we can agree that it will stagnate prices for the next 24 months because it IS coming on the market all the time. I’m looking at price tiers of supply within markets. For example in one market I focus on, the type of property has less than a 3 month supply. So I’m not too concerned that municipality has a 8.5 month supply. Because the property I’m targeting is in high demand and prices are stable, I’m not too concerned about the fact that there are X millions of homes in the US in the shadow inventory. I suggest you mine through the data out there and understand how it specifically affects what you’re doing within real estate.