Home Sales Surge ... But Will Higher Rates Spoil The Party?

That $8,000 tax credit for first time home buyers may be working.   Existing home sales last month surged 7.2%, one of the biggest month-over-month jumps in years.   The annualized pace of sales is now 5.24 million homes, the highest in two years and much more than the average estimate of economists.

As our chart indicates, home sales are still well below the peak of a few years ago, but clearly the the trend has been up.

Not to throw water on what's arguably a solid number, but a few things to consider.

First, 1/3rd of these sales are 'short' sales or foreclosures.   That's down from previous figures but still a very high number overall.

Second, about 1 in 8 of those buyers paid cash for their homes, likely foreclosures.     Once the cash is expended, it's a big question about whether the credit buyer will step up.   As you can see from the chart above, there is a clear relationship between interest rates and sales.   As rates fall, sales tend to rise and vice versa.    If (when) interest rates normalize again, history suggests it may put the brakes on sales.   This is exactly why the Fed has been buying mortgage backed debt .... pushing to keep rates low.