Homes for sale in Washington
A "For Rent, For Sale" sign is seen outside of a home in Washington, U.S., July 7, 2022. Reuters

U.S. existing home sales dropped to the lowest level in more than 12 years in January, but the pace of decline slowed, raising cautious optimism that the housing market slump could be close to reaching a bottom.

The report from the National Association of Realtors on Tuesday also showed the smallest increase in annual house prices since 2012, which should help to improve affordability. It will, however, be a while before the housing market turns the corner.

Mortgage rates have resumed their upward trend after robust retail sales and labor market data as well as strong monthly inflation readings raised the prospect of the Federal Reserve maintaining its interest rate hiking campaign through summer.

"The marginal decline in existing home sales in January supports our view that housing market activity is reaching a trough," said Sam Hall, property economist at Capital Economics. "But growing economic headwinds and stretched affordability mean sales will recover only gradually this year."

Existing home sales fell 0.7% to a seasonally adjusted annual rate of 4.00 million units last month, the lowest level since October 2010, when the nation was grappling with the foreclosure crisis. That marked the 12th straight monthly decline in sales, the longest such stretch since 1999.

Sales fell in the Northeast and Midwest, likely because of harsh weather, but rose in the South and West.

Economists polled by Reuters had forecast home sales rising to a rate of 4.10 million units. Home resales, which account for the biggest share of U.S. housing sales, plunged 36.9% on a year-on-year basis in January.

The housing market has been the biggest casualty of the Fed's aggressive monetary policy tightening. Residential investment has contracted for seven straight quarters, the longest such stretch since 2009.

Government data last week showed single-family homebuilding and permits for future home construction declining in January.

The 30-year fixed mortgage rate rose to an average 6.32% last week from 6.12% the prior week, according to data from mortgage finance agency Freddie Mac. The second straight weekly increase reflected a spike in U.S. Treasury yields.

Stocks on Wall Street were trading lower. The dollar rose against basket of currencies. U.S. Treasury prices fell.

HOPEFUL SIGNS

But there are some rays of hope. Homebuilders confidence rose to a five-month high in February, though morale remains depressed. The median existing house price increased 1.3% from a year earlier to $359,000 in January as homeowners whose properties have been on the market for a while lowered asking prices. That was the smallest annual gain since February 2012.

Properties typically remained on the market for 33 days last month, up from 26 days in December.

"Buyers are beginning to have better negotiating power," said NAR chief economist Lawrence Yun. "Homes sitting on the market for more than 60 days can be purchased for around 10% less than the original list price."

There were 980,000 previously owned homes on the market, up 2.1% from December and 15.3% from a year ago. But this mostly reflected homes staying on the market longer than in prior months. New listings remained low.

At January's sales pace, it would take 2.9 months to exhaust the current inventory of existing homes up from 1.6 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.

Fifty-four percent of homes sold in January were on the market for less than a month. First-time buyers accounted for 31% of sales, up from 27% a year ago. All-cash sales made up 29% of transactions compared to 27% a year ago.

While the housing market is still searching for a floor, business activity rebounded in February, reaching its highest level in eight months, according to a survey on Tuesday.

S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 50.2 this month from a final reading of 46.8 in January.

That ended seven straight months of the index running below the 50 mark, which indicates contraction in the private sector. The services sector accounted for the rise in business activity, while manufacturing remained weak. Economists had forecast the index at 47.5.

The rebound in business activity fits in with the recent robust retail sales, the labor market and manufacturing production data, which have suggested solid momentum in the economy at the start of the year.

"The economy is finding its balance," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.