Economists were expecting another slight decline in existing home sales in February.  The report this morning from the National Association of Realtors (NAR) set the initial February reading at 4.60 million, a decline of 0.4 percent.  No one should fear this as a harbinger of housing deteriorating—it’s actually a reflection of the existing home market getting better.

But better is not necessarily bigger.  Better is a result of having more of what we want to see and less of what we don’t want to see.  While the overall volume is declining slightly, we are seeing that outcome as a result of fewer investor transactions, fewer foreclosures, and fewer REO sales.  Therefore, the resulting mix is becoming more and more normal—good old fashioned, non-distressed resales purchased by consumers who intend to live in the homes.  Call it the return to the old normal.  The old normal is good for housing, and much better for the economy than what we have been living through for 7+ years.

An indicator that conditions are improving, and not deteriorating, is continued price appreciation. According to the NAR release, the median existing home price in February was $189,000, 9.1 percent up over this time last year.

We can afford to see further declines in overall volumes.  The 45-year average of single family existing home sales is a monthly annualized rate of 3.52 million; February’s rate of 4.04 million is still 14.8% percent over that level.  The abnormal level of investor activity continues to be about 9 percent of the volume, so take away that and we would still be at least 5 percent above average in volume.

Meanwhile we are not seeing the financing part of the equation hurt demand.  Mortgage rates on actual mortgages used to purchase homes are not ticking up.  The average mortgage rate on purchase mortgages has slightly declined since the beginning of the year due in part to an increasing share of adjustable rate mortgages.  At the same time, the percentage of homes purchased with cash has remained steady.  Of course with declining investor activity this does likely mean that consumers are now more likely to purchase with cash, thus explaining why purchase mortgage numbers are in decline.

Bottom line—we have strong demand that is keeping limited supply in check, as the months’ supply of existing homes remain at very low levels.   Therefore as spring brings out more home shoppers, we should continue to see housing get better.