Housing Recovery at a Crossroad

I hate to say "I told you so," okay, that's a lie, who doesn't love to be right?

Existing homesales took a U-turn in August after four straight months of gains, and this is exactly what we were afraid of, as inventory at the low end of the market runs dry and the first time home buyer tax credit draws to a close.

As I showed you in the last couple of months, sales activity is all on the low end of the market.

This month the Realtors added a new chart to their release (the chart I've been showing you for the last two months).

August Regional Existing Home Sales by Price Class

REGION $0-100K $100-250K $250-500K $500-750K $750-1M $1M-2M $2M+
Northeast 8.8% 14.4% 0.0% -13.4% -18.4% -23.7% -54.3%
Midwest 3.8% 2.2% -8.1% -32.2% -27.5% -31.5% -45.7%
South 20.9% -0.2% -11.0% -12.5% -6.8% -17.3% -47.7%
West 152.3% 10.8% -16.6% -10.9% -33.6% -20.9% -8.0%
U.S. 20.9% 4.9% -9.6% -14.7% -22.5% -22.1% -39.1%
2009 National Association of Realtors

August Regional Existing Home Sales by Price Class

REGION $0-100K $100-250K $250-500K $500-750K $750-1M $1M-2M $2M+
U.S 20.9% 48.3% 23.1% 5.3% 1.3% 1.0% 0.2%
2009 National Association of Realtors

As you can clearly see, 70 percent of the sales market is under $250,000. Is that healthy? I don't think so.

Here's what NAR Chief Economist Lawrence Yun says about it:

This is indicating that the first time buyers are typically on the lower price, looking for lower priced homes, so that is stimulating, and also for repeat buyers, I think this is a change in psychology or just a view that they want to stay well within their budget, and the tighter underwriting standards are also saying to people: Don't overstretch, if you overstretch we will not lend you the money.

He also re-trashed the new appraisal rules for slowing down the home buying process and stalling certain sales. But I think we're seeing exactly what we expected, which is that the "recovery" in sales was based entirely on juice from the first time home buyer tax credit and big activity on the lowest priced properties and foreclosures. My minions out in California, where foreclosure sales rule, tell me there isn't enough low-priced inventory. With the mid and high end still stuck, there's your sales decrease.

Until we see recovery across the market, at all price points, we can't say this housing market is in full recovery.

I do think the Fed's new commitment yesterday to stick with and slightly extend its purchase of agency MBS is a positive sign going forward because it will keep mortgage rates low.

But the first time home buyer tax credit expiration will do just the opposite.

A new NAR survey of home buyers found the a full half of all first timers said they would not have purchased without the credit. I'm not taking a side in the tax credit debate (there are enough others doing that), but I am saying that whatever the outcome, extension or no extension, it will have a large effect on home sales going forward.

This is a critical time in the housing recovery.

Some say we're at bottom, some say we're "bouncing around the bottom" and others are expecting a double-dip housing recession.

Stay tuned.

Questions? Comments? RealtyCheck@cnbc.com