Why the surge in home sales is bad news

By Mark Gimein, The Big Money

For the first time in a year, the housing market is stirring. Sales that had come to a halt are revving up with the benefit of what look like fire-sale prices.

In Southern California in September, the number of homes sold jumped by close to two-thirds from a year earlier; in the Great Foreclosure Belt around Los Angeles, places like San Bernardino and Riverside counties, the jump was even bigger, with houses selling at twice the pace of a year ago.

At another time this would be welcomed as good news: Buyers are back! Except that it's clear that this wave is driven by lenders trying to get anything they can get right now for the many thousands of houses they've foreclosed on, because as bad the housing market looks now, it'll get even worse.

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When I wrote about housing six months ago, I pointed out some of the houses on the market at asking prices 30% or 40% off what they'd sold at just a year or so earlier. The response was disbelief. Did I select my examples at random, one reader snidely asked, or did I cherry-pick to get the most dramatic numbers?

Well, I didn't cherry-pick, and now you won't find anyone doubting that drops of this scale are par for the course.

Unfortunately, we have a lot further to go.

The Case/Shiller price index, a measure of home prices going back to 1987, shows California home prices still at about twice where they were at the peak of the last big housing cycle back in 1990. So just to get back to the top of the last peak, prices would have to drop another 50%.

Interest rates at that time were substantially higher, in the range of 10%. If you take that into account and look not at sales prices but at the cost of paying mortgages, we're still in for a drop of an additional 30%.

That's if prices don't fall below the last peak and interest rates stay at 6.5% or less. In other words, it's a best-case scenario.

These numbers are so dire that they might sound like scare-mongering, except that if you look through the recent sales listings at any number of online sites, you won't have to search very hard to find price drops right along the lines of these numbers.

This house in Riverside, Calif., for instance, was bought for $586,000 in 2006, foreclosed on in November 2007 and sold again this summer for $147,000 -- just 25% of what it sold for two years ago. And here's another heart-stopping fact: Even that vastly diminished sales price was financed, according to real estate records, with a 100% mortgage. Good luck getting one of those now.

Continued: Incomes still out of line with home prices

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