HOPES FOR a rapid recovery in the troubled US housing industry remained subdued yesterday as sales of previously owned homes showed an unexpectedly strong 3.1 per cent increase but failed to stem a rise in inventories.

With sharply lower prices luring buyers in areas hit hardest by the mortgage crisis, the pace of existing home sales jumped to a seasonally adjusted annual rate of five million units in July – the highest in five months – from 4.85 million units in June, the National Association of Realtors (Nar) said.

The data strengthened evidence that home sales have stabilised recently, providing a springboard for recovery in the US housing market, which has been at the root of the downturn and the unrest in financial markets.

But economists remained cautious since most of the gains were concentrated in areas that had suffered the brunt of the crisis and were dominated by sales at extremely low prices. The median home price, which had increased in June, fell back to $212,400 (€144,000) last month – more than 7 per cent lower than in July last year.

In addition, the inventory of unsold homes continued to rise, from a supply of 11.1 months in June to a record 11.2 months in July amid what the Nar described as a sharp increase in condominium supply.

Existing home sales in the west, where states such as California, Nevada and Arizona have suffered some of the worst symptoms of the bust, recorded the biggest gain, up 9.7 per cent last month. Sales rose in the northeast by 5.9 per cent and in the midwest by 0.9 per cent, but fell in the south by 0.5 per cent.

The overall jump in existing home sales came in spite of an increase in the 30-year fixed mortgage rate, which rose from 6.32 per cent in June to 6.43 per cent in July amid turmoil at Fannie Mae and Freddie Mac, the two government-sponsored mortgage firms, which have accounted for nearly three-quarters of new US mortgages during the slump.

Experts have argued that the main purpose of any rescue of Fannie and Freddie by the US treasury would be to prevent a further rise in mortgage rates.

Freddie Mac yesterday easily sold $2 billion of short-term debt, helping to reassure stock markets that Freddie and rival Fannie Mae still have access to capital to fund their operations without a government rescue.

Shares in Freddie rose by more than 12 per cent and Fannie was 4 per cent higher in morning trade, halting last week’s dramatic sell-off for the two companies even as broader stock markets were lower yesterday.

Freddie’s auction of $2 billion in three and six-month bills drew stronger than usual investor demand as buyers were attracted by higher interest rates for the paper. Fannie and Freddie have paid sharply higher interest rates for their debt in recent weeks as investors seek compensation for the uncertainty shrouding the ultimate scale of losses at the two companies and the potential structure of any government rescue. – (Financial Times service)