Implications: Existing home sales increased 4.9% in May to a 4.89 million annual rate, well above consensus expectations. Sales are still hovering just below the average level of the past two years, but we think the gains of the past couple of months are the start of a new upward trend. The best news in today's report is that a lack of inventory, which has been a major culprit behind slow sales, seems to be changing. Inventories continued to increase in May and are now up 6% versus a year ago. More inventory should help spur sales in the months ahead. One key reason for growing inventories is that home prices continue to move higher (median prices for existing homes are up 5.1% from a year ago). In other words, recovering home prices are getting more potential sellers into the market, which will increase sales. Either way, whether existing home sales are up or down, these data should not change anyone's impression about the overall economy. Remember, existing home sales contribute almost zero to GDP. Also, despite recent gains in sales, credit remains tight, making it relatively hard to get a mortgage. This explains why 32% of all sales in May were all-cash transactions. However, we do not believe higher mortgage rates are noticeably holding back sales. The US had a bubble in housing during 2003-05, when 30-year mortgage rates averaged 5.8%. Today they are 4.2%. We remain convinced that the underlying trend for housing remains upward.

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