Implications: The healing in the housing market is further along than previously thought. Existing home sales increased 5% in December, the third consecutive gain, to the highest level since January 2011. More importantly, the inventory of existing homes is down 21% versus last year and at the lowest level since 2005. As a result, the months' supply of unsold homes is down to 6.2, the lowest since April 2006. Even with this great news the National Association of Realtors said cancelled contracts to buy existing homes remained at 33% in December, which is three times the normal level. These figures suggest that, despite record low mortgage rates, home buyers still face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 31 percent of purchases in December versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it's a great time to buy. With credit conditions likely to remain tight for some time, we don't expect a huge increase in home sales any time soon, but, given declining inventories, the housing market is definitely on the mend.
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