Rising Home Sales Are Not Overtly Positive

Yesterday the housing cheerleaders were expressing their jubilation over the unexpected 5.1% rise in existing home sales during February. Of course, the median house price slumped 15.5% year-over-year, the second-biggest drop on record, and distressed properties accounted for 45% of all sales. These perpetual optimists do not understand the housing market, refuse to analyze housing data in context and consistently focus only on the information that they can spin in some positive way.

Housing sales volumes rose for two reasons, neither of which was unexpected. When prices decline, sales rise. This is the magic of supply and demand. Since prices fell 15.5% it isn’t that difficult to imagine that sales volumes might increase modestly from sluggish levels.

The single most important piece of information contained in the release was the mix of distressed properties. Almost half of all sales came from foreclosures or other forced sales.

This may be shocking to many self-described housing analysts, but as foreclosures rise, the volume of foreclosure sales also increases. Lenders do not want to own homes. They price these properties at a discount well below prevailing market values precisely so they will sell quickly. Since the number of foreclosures is growing it is inevitable that the volume of distressed sales will also rise.

Sales volumes could rise 50% based on increasing numbers of defaults, but it wouldn’t be an overtly positive story for housing stabilization. The existence of massive numbers of foreclosed properties and the extraordinarily high mix of forced sales ensures that housing prices will continue to collapse. The rising transaction volumes are a positive only in that the market is clearing and prices are falling towards sustainable levels.

The housing market will stabilize when non-forced transactions are rising, the inventory of houses for sale is both falling and near normal levels, and prices are no longer declining. At present, no data trend exists which would indicate near-term, housing market stabilization.