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Excluding Distressed Sales, Are Home Prices Just Fine?

Home prices in May were down 7.4 percent year-over-year, according to a new report from CoreLogic. This is the first of the May numbers, as S&P Case Shiller, which was released earlier this week, looks back two months.

CoreLogic's

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report is unique, though, in that it gives the big bad number (which was a bigger dip than the 6.7-percent annual drop in April) and then it strips out the distressed sales and comes up with a new number. Distressed sales include foreclosed properties (bank-owned/REO) and short sales, where the home is sold for less than the value of the mortgage to avoid foreclosure.

Without the distressed sales, home prices fell just 0.4 percent in May, essentially flat. Overall, according to the report, "including distressed transactions, the peak-to-current change in the national HPI (Home Price Index, from April 2006 to May 2011) was -32.7 percent. Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -21.2 percent."

So should we consider that home prices are really just fine? After all, they might not be moving up, but they're not falling, and they're down far less than the headlines scream.

You would have to ignore an awful lot of factors to believe that—number one being that distressed sales make up more than one-third of the current real estate market, and far higher percentages in some of the busiest, albeit most distressed, sales markets.

CoreLogic's

Secondly, distressed sales might become an even larger share of the market during the next year, as banks are now ramping up the foreclosure process, taking big losses, making deals and cleaning up potential legal obstacles. That in the face of the fact that the pipeline of foreclosures is huge. Read this from Lender Processing Services on Wednesday. Read it a few times, so it really sinks in:

"With foreclosure sales at 78,676 at month end, the volume of serious delinquencies and foreclosures over-shadowed the number of foreclosure sales by 50:1. In fact, there are still significantly fewer foreclosure sales than there were before foreclosure moratoria were put into place, and foreclosure sales are declining."

CoreLogic's

Now tell me if it makes any sense whatsoever to strip the distress out of the numbers and come to the conclusion that home prices are done falling. CoreLogic doesn't do that, but I'm guessing some folks reading its report might.

Home prices are stabilizing in some markets, like here in Washington, D.C., but they are still under pressure in most major and not-so-major markets, not just due to distressed comparables, but because of a tight and expensive mortgage market. And one more thing: Would everyone please stop ignoring the fact that the recent monthly increases in home prices are largely seasonal!

Questions? Comments? RealtyCheck@cnbc.com And follow me onTwitter @Diana_Olick