Existing Home Sales data for December ’09 is encouraging but mixed signals. The following is a summary of an analysis by Steve Wood, Chief Economists with Insight Economics, LLC.

Existing Home Sales fell by a record 16.7% in December to 5.45M, compared with market expectations for a much smaller decrease to 6.00M. The decline was largely due to the expiration of the first time homebuyer’s tax credit, which as subsequently been extended and expanded. The average of November and December was 6.00M, in line with its October level. Still, home re-sales are 15.0% above their year ago levels but also still 9.8% below their September 2005 high record. There should be a substantial recovery next month.

Inventory of Homes Available for Sale fell by 6.6% to 3,289k, its lowest level since March 2006 and 11.1% below its year ago level. Because of the plunge in home sales, the months supply rose to 7.2 months. The months supply is significantly lower for low-priced homes and substantially higher for high-priced homes. Without factoring in what appears to be a large “shadow” of homes available for sale, the measured inventory of unsold homes is only moderately above “normal” levels.

Home Prices rose compared to their year ago levels. Over the past year, average prices have increased by 3.6% while median prices have risen by 1.5%. These are the only second year-on-year prices increases in the last 41 months and may indicate a turning point is at hand.

What is the “shadow” inventory?
This is the term given to homes that are in serious delinquency or in the foreclosure process. First American’s Core Logic recently estimated that this inventory total at 1.7M homes that are ready to flood the market as of September 2009.

It is estimated that the injection of this inventory into the market could impact the housing market, just as the months inventory of existing homes for sale begins to normalize. The true impact depends on how controlled and measured the lending institutions place their inventory on the market.