Implications:  Don't be fooled by today's soft headline number, existing home sales finished 2016 on a strong note, coming in for the full calendar year at the strongest sales pace in a decade.  Sales of previously-owned homes fell 2.8% in December to a 5.49 million annual rate, but are still up 0.7% from a year ago.  Home sales are volatile from month to month and we expect the general upward trend of the past several years to keep going.  That being said, tight supply and rising prices will continue to be headwinds heading into the new year.  Remarkably, sales in 2016 hit their highest level since 2006 even though inventories remain very low.  In fact, inventories are now at their lowest level since the National Association of Realtors® (NAR) began tracking supply in 1999.  The months' supply of existing homes – how long it would take to sell the current inventory at the most recent selling pace – is only 3.6 months.  According to the NAR, anything less than 5.0 months is considered tight supply.  Meanwhile, growing demand for housing has driven up median prices, which are up 4.0% from a year ago.  While this may temporarily price some lower-end buyers out of the market, it should ultimately help alleviate some of the supply constraints as "on the fence" sellers take advantage of higher prices and trade-up or trade-down to a new home.  In addition, look for a faster pace of home building in the next couple of years.  Although some analysts may be concerned about the impact of higher mortgage rates, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is eventually going to move higher again.  In other news this morning, the Richmond Fed index, which measures mid-Atlantic factory sentiment, rose to +12 in January from +8 in December, signaling further expansion in the manufacturing sector. We expect the national ISM will continue to show expansion as well.

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