The home sales covered by the latest numbers came during the great foreclosure freeze of 2010, when the banks had to stop seizing and selling homes of delinquent borrowers, thanks to the robo-signing scandal. Taking these distressed sales off the market significantly improved the home-sales data.
I predicted this in late October:
I think there is a significant possibility that the price data could produce some better numbers later this year. But far from being an indication that the market for homes is improving, this will be a statistical illusion caused by the foreclosure fiasco. And if this improvement does happen, it will likely foreshadow an even sharper drop rather than a continued rise.
As a result of the foreclosure freezes, many distressed sales were taken out of the market in October. Those sales are typically at lower prices, which means their absence could create a illusory price increase. The housing market could Freeze Upward. A sure sign that this is happening: home prices rise while the number of sales of existing homes declines.
Of course, the head-fake rise may never happen, if buyers have been so frightened by the uncertainty caused by the mess that they have stayed out of the market. Alternatively, if mortgage lending slowed significantly during the freeze, this could also dampen the Freeze Upward effect on prices.
The Freeze Upward effect won't last long. Slowing down foreclosure sales will result in a build-up of housing inventory, which will scare housing-market investors; and when that inventory comes onto the market, create excess supply that will push down prices.
Sure enough, if you look back at the existing home sales in November, you’ll see that the numbers were weaker than expected. Fewer houses were sold, at slightly better than expected prices. It's a head-fake.
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