Housing data flip-flop: Don’t bank on a recovery yet

October 26, 2010, 7:11 PM UTC

Great news on home sales was followed up by dismal data on home prices. The lesson? Don’t look to the monthly figures for signs a recovery is near.

For the second month in a row, sales of existing homes in September rose more than many economists expected. This might make a dent on the housing glut, but it doesn’t mean a recovery is underway.

The much anticipated clearance of the housing market is still about three years away — the excess inventory of homes continues to remain unusually high. What’s more, investigations into whether the nation’s major banks foreclosed on homes improperly will probably stall the housing recovery further, says Paul Dales, economist with Capital Economics, a London-based macroeconomic research consultancy.

Sales of previously-owned homes in September rose 10% to an annual rate of 4.53 million units, up from the 4.25 million rate in August, the National Association of Realtors reported Monday. The gains seen during the past two months are welcome news, especially since home sales in July sank 27% — the lowest level in 15 years.

But let’s not overplay the glimmer of hope. The strong numbers in September are mostly related to a government tax credit that helped increase home sales. When the tax expired in April, sales fell more than they would have without the break and only starting to normalize.

So while sales rose 18% in just two months, levels are still 22% below the April peak sale of 5.79 million homes, Dales says. And according to the latest  S&P/Case Shiller composite index of 20 metropolitan areas, home prices declined more than expected during August. The index dropped by 0.3% during the month.

As with most monthly statistics, housing figures tend to fluctuate. And given that the housing market has been so volatile with large government housing assistance programs and now with the foreclosure investigations, the figures will likely be choppy for months to come.

If economists like Dales are right, sales are expected to drop in October amid investigations into whether banks cut corners and used shoddy documents to foreclose on homes. On Monday, the Federal Reserve launched its own investigation into the matter. It’s anybody’s guess when this issue could get resolved.

Ally Financial’s GMAC Mortgage unit, JPMorgan Chase (JPM), and Bank of America (BAC) are among lenders that have temporarily halted a portion of foreclosures while the companies review paperwork.

Given that foreclosures made up a significant chunk, about 35%, of September’s sales, Dales expects sales to drop in October. Even if the hold on foreclosures means sales on just 15% of foreclosed homes fall through, that’s 240,000 fewer homes sold in October.

“The rest will really depend how long the foreclosure problems will continue,” Dales says, noting that the slow growing economy, widespread negative equity and decline in the desire to own a home will continue to weigh on sales for at least three years. Also, the inventory of homes remains at high 4 million in September – which is roughly 1.5 million too many homes for sales to meet demand.

With so many variables pushing sales figures in all kinds of direction, how can we tell if a true housing recovery is here? As National Public Radio’s Planet Money Jacob Goldstein points, the rule of thumb is about six months of housing supply. As of September, Goldstein notes, it would take more than 10 months to sell the inventory of existing homes.

That is an improvement from the 12 months of supply this past summer, but still a ways away from a true recovery.