Home sales drop 2.7% in August from July

— -- August home sales waned after growing strongly the past four months, a sign that the housing recovery hasn't yet hit its stride.

Sales of existing homes dropped 2.7% in August from July, the National Association of Realtors (NAR) reported Thursday. In the previous four months, sales had increased a total of 15%.

Sales fell to a seasonally adjusted annual rate of 5.1 million — below what many analysts had forecast, although still the second-highest level of sales activity in nearly two years.

"It's a little disappointing," says Lawrence Yun, chief NAR economist, adding that the drop in sales indicates a continued need for federal stimulus efforts. "We're on the cusp of a self-sufficient recovery. There may still be some consumer fear, and the stimulus measure is (aimed) at changing that."

The decline came even though the average interest rate on a 30-year fixed mortgage fell from 5.22% in July to 5.19% in August, according to Freddie Mac. It was at 5.04% for the week ended Sept. 24.

Home prices also slid. The national median existing-home price was $177,700 in August, down 12.5% from August 2008, according to the NAR report.

Prices may be down in part because distressed homes, which include foreclosed properties, made up about 30% of sales. Homes sold at foreclosure often go for prices as much as 20% below those of non-distressed properties.

Joel Naroff, of Naroff Economic Advisors, says the drop in sales does not mean that the housing recovery is faltering. Economic indicators often fluctuate as a downturn ends, he says, so no one should expect consistently better numbers each month.

"We're still moving forward," Naroff says.

One improvement is a shrinking inventory of unsold homes. At the end of August, that inventory represented an 8.5-month supply at the current sales rate, down from 9.3 months in July. Unsold inventory totals are 16.4% lower than a year ago.

Yun says the dip in sales shows the need for Congress to continue stimulus measures such as the tax credit of up to $8,000 for first-time home buyers. Buyers now have until Nov. 30 to close on a home to take advantage of the credit; first-time home buyers make up about 30% of home sales.

Bernard Baumohl, chief economist of The Economic Outlook Group, says the challenge now is to sustain the current housing recovery, which is threatened by high unemployment and the likelihood of higher interest rates.

"We may see mortgage rates of 5.5% next year and 6% by the end of next year," Baumohl says.