Spike in existing home sales mostly fueled by foreclosures

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The nearly 500-point dead-cat-bounce on Wall Street yesterday was credited in part to the reported increase in existing home sales. The headline about homes: resales rose 5.1% to a 4.72 million annual rate from 4.49 million in January, via the National Association of Realtors.

The devil rested in the details which showed that 45% of that was firesales from distressed homes. The downside? All that cheap inventory drove all home prices lower.

The large number of these distressed property sales is driving prices lower. The median price for an existing home fell 15.5% last month to $165,400. Falling prices depress demand, contributing to the high inventory that is a factor keeping prices down. Inventories of previously owned homes rose 5.2% at the end of February to 3.8 million available for sale, which represented a supply of 9.7 months at the current sales pace.

So sales went up because of lower prices which is good if you are buying but if, like many of us, you aren’t buying but just watching your home equity diminish then it’s bad.

Even the usually suspect NAR chief economist had to admit this was problematic.

Lawrence Yun: “Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price.”

Given this why did Wall Street react the way it did? Oh, right. The joyous news that the government has released its plan to deal with all those toxic assets. That plan essentially works out to the government bribing investors to buy some of these assets whose worth is unknown save for the fact that it is less today than yesterday — a cycle which is likely to continue for some time to come.

This will in time allow the banks to move these great stinking huge piles of debt off their books and onto … well, who knows. The debt remains. It’s just that now it will be held by someone else. US investors who decide to dive into this risk pool will be in the novel position of essentially paying for it twice. Once with debt created out of thin air by the government — and therefore theoretically to be paid for by taxes — and once with their own money.

I am clearly not smart enough to understand this whole plan. I fervently hope that I am wrong and sometime in the future someone will embarrass me by reminding me of what I had written. I also fervently hope the Cubs will win the series. It’s only been 101 years after all.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage,  a satirical look at marketing and business.

Last 3 posts by Constantine von Hoffman

• Housing prices sink as underwater number rises - August 11th, 2009
• The home price increase that isn’t - July 28th, 2009
• Why the increase in housing starts means trouble - July 21st, 2009

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Tagged as: Foreclosure, Mortgages, sales, Wall Street