By ANDREW JEFFERY

This post first appeared on Minyanville.

This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”

The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).

While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.

The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.

Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period — in this case, more cheap houses than expensive ones — property values remain in a decidedly downward trend.

But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.

Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.

Click to enlarge

The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.

Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):

First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.

Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.

With that in mind, the current “euphoria” over housing data — after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year’s weak totals — seems a bit premature.

This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.

But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.

To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.

If you bought a house in February, it’s a 50/50 bet you picked up a foreclosure.

The National Association of Realtors released data this morning indicating almost half of all transactions last month involved a bank owned home. Sales jumped 5.1% from January, to an annualized rate of 4.72 million. Prices, however, continued to decline as first time home buyers snapped up foreclosed houses on the cheap. Prices slid 15.5% compared to last year, the second biggest drop on record, according to Bloomberg.

This price drop, however, also reflects the mix of homes being sold, not just declining property values. What the heck does that mean? Find out here.

Of note, volatility continues in the Northeast. Last month, Cirios readers will remember we pointed out that sales dropped by a whopping 14% month-over-month. In February, the Northeast saw a strong rebound, with transactions up 15.6%. So, we’re about back to where we were at the beginning of the year.

The lesson here is illustrative of the dangerous of relying on monthly data, which can be significantly impacted by short-term affects like weather or government intervention.

So, be skeptical about the resounding calls for a bottom in housing pundits are likely to glean from this one, better than expected data point. Stay tuned for next month’s release when we find out if, as the saying goes, one month does not a trend make.

Conditions in the world of building new homes remains poor to quite poor. The National Association of Homebuilders (or NAHB), the industry lobbyist group, released its monthly builder confidence index this morning, which registered a near-record low reading of 9. Sentiment was unchanged from last month, which matched analysts expectations.

The builder group is hopeful the market loosens up in the coming months, ending almost 4 years of rotten building conditions. Likewise, I am hopeful to find a bag full of money on the streets of San Francisco, somehow passed over by the swarms of transient, unemployed investment bankers scrounging Market Street for scraps, ending almost 4 years of rotten personal financial conditions.

The NAHB also made the bold statement that they believe the housing market will bottom around the middle of this year. This estimation is based primarily on the aforementioned statement that they hope the market will loosen up. There is little evidence the housing market is approaching a bottom, as prices are now tumbling in virtually every region of the country.

Anecdotal evidence of the challenges facing homebuilders mirrors the industry’s sentiment reading.

Banks are literally giving land away for free, but the economics of new construction are so upside down that builders are turning it down. The carrying costs – primarily fees paid to municipalities – are so high the land isn’t worth the price: Nothing.

One of the first signs of a housing turnaround will be when builders begin acquiring vacant land. Until this very modest indication of confidence is seen, the bottom will remain elusive — hope notwithstanding.

By ANDREW JEFFERY

This post first appeared on Minyanville.

There isn’t an economic forecaster or media pundit alive who isn’t angling to be the first to (correctly) call the bottom in housing. Many have tried; they all have failed.

But what happens when one’s right?

At some point in the future, broad home price indicators will cease to slide, then stabilize and even begin to move back up. When, and in what shape that trajectory will be, of course remains a mystery. As I’ve written in the past, the eventual recovery in housing will be a prolonged, localized event. The rising tide will not lift all boats, as the fundamentals of the old cliché “location, location, location” will be truer than ever.

And although predicting the date of this event is a fool’s errand, savvy home buyers will be ready to jump in ahead of those who remain in their shells long after the best bargains are behind them.

Here are 5 simple things you, the future home buyer can do now, without putting your nest egg at risk, to be ready for the coming opportunities in real estate:

1. Have patience.

There will be false bottoms, dead-cat bounces and treacherous pitfalls on the path to a recovery in real estate. Be patient. Don’t believe the hype – a couple months of strong sales numbers don’t foretell and imminent rebound in prices. Let the beginnings of a trend develop before you begin your home search in earnest. Future appreciation will come slowly, as tightened mortgage guidelines and fear of the collapse we’re now experiencing will not be soon forgotten.

2. Find a market, do your homework.

Had your eye on that classic Victorian around the corner from your kids’ future grade school, and hoping the elderly couple living there knock off just in time for you to swoop in at the estate sale? Expand your search.

Pick a couple of areas you could be happy in – look in multiple cities even. By focusing too narrowly on a single street, or even a single neighborhood, you could be missing out on what could be a fantastic opportunity on the other side of town. Don’t compromise, but play with your list of priorities to give yourself the most “exposure” to localized markets that may become increasingly attractive.

Tour the schools, scope the neighbors – hang around on Halloween to see who gets egged. RealtyTrac.com is a great resource for watching foreclosure activity all over the country and in your backyard. Their free site provides a great overview of cities and neighborhoods, but you have to pay for the house-by-house detail. Unfamiliar with an area? Use RealtyTrac to eyeball major neighborhood dividers (railroad tracks, highways, main roads, etc.) and examine foreclosure activity on either side.

3. Find a broker and start a housing “tracker”.

Real estate brokers can be a valuable tool in your home search – use them.

An aside: The commonly used term “realtor” denotes an association with the National Association of Realtors, or NAR, the lobbyists who have been predicting a bottom since the downturn began over 3 years ago. Tread carefully with anyone proudly bearing an NAR pin. Contrary to what many tell you, you don’t need to be a realtor to have access to MLS. But I digress.

Today, with transactions down in all but the most distressed areas, any broker worth his (or her) salt should be out prospecting for future clients, not proclaiming the time to buy is now. Collect referrals, test drive a broker or 2 and find one you’re comfortable with. Your broker should not just understand the local market but be up to speed on the macro-level events affecting the real estate and mortgage markets. Ask him what a CDO (collateralized debt obligation) is – watch for a flinch. For better or for worse, understanding the state of Wall Street is as important these days as understanding the state of your street.

Ask your broker to help you develop a “housing tracker,” a simple tool that allows you to watch homes as they come on the market to see when and for how much they sell. Watching the life cycle of homes in a given market will give you a sense of how desperate sellers are, when asking prices drop and what concessions buyers are able to receive from sellers. As concessions begin to swing in favor of the sellers, the bottom may be nigh.

4. Start saving money.

If there’s one sure bet in the housing market, it’s that mortgage requirements will remain tight for the foreseeable future. Banks — Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) being the obvious examples — are hoarding cash and reticent to lend even to the most qualified buyers. Unless a loan falls within guidelines set by Fannie Mae (FNM) and Freddie Mac (FRE), rates remain elevated and approvals elusive. This isn’t likely to change any time soon.

Save for a down payment and be able to point to liquid reserves (i.e. money in the bank) during the application process. Think about this as the lender’s cushion should you fall on hard times – and banks will need all the cushion they can get.

5. Think of your home as an investment, not just a place to raise your kids.

This may seem counter-intuitive, since speculation on housing prices played a huge role in creating the recent housing bubble. But speculating and investing are not the same thing.

A home, in addition to being a place to raise kids, is a massive financial obligation. Becoming emotionally attached to a house, rationalizing the financial realities away and hoping paychecks keep coming simply isn’t a viable home-buying strategy. As un-romantic as it may be, treat a home as you would a stock: Examine it, turn it upside down, run the numbers. Love it every day you’re there, but financial responsibility and emotional attachment don’t need to be mutually exclusive.

The time to buy may not be today — and it may not be tomorrow — but we’ll be closer to that day tomorrow than we are today. However, just as prices overshot to the upside, they’ll likely overshoot to the downside – be ready when that day comes.

Preparation, not hoping, will be the key to taking advantage of the opportunities that will present themselves on the other side of this mess.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Americans finally get it: Home prices are falling.

This may seem like a preposterous statement, what with the entire global financial system in disarray after the collapse of the US housing market, but we Americans are stubbornly optimistic people, content to ignore calamity as long as we possibly can.

A study released this week by Zillow, a real estate information website best known for its wildly inaccurate estimates of property valies, shows Americans have finally succumbed to the notion that home prices aren’t going up anymore. 57% of homeowners polled believe their own home lost value during 2008, up from 38% who felt that way just 6 months earlier.

Interestingly, when asked about the future, respondents were upbeat: Only 30% estimate the value of their house will decrease in the next 6 months. Of course, their neighbors aren’t so lucky: Forty-seven percent believe home values in their local markets will fall during the same time period.

Zillow has become something of a cult phenomenon in the past few years, as it  allows homeowners to go online and see how much their house is “worth.” By its own admission, Zillow’s values are merely estimates based on amalgamating sales data from nearby homes, comparing bedroom counts, living area, lot size and other salient characteristics.

What few people realize, however, is that Zillow’s valuation algorithm isn’t just used by John Q. Homeowner: Every big lender in the country uses a similarly opaque formula to price real estate.

Wells Fargo (WFC) – now the biggest US home lender in the country after its acquisition of Wachovia – holds tens of thousands of mortgages on its books, each backed by a unique house. It’s impractical to regularly review each home for a fresh value, so Wells and other big banks like Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) rely on analytics firms to provide property values churned out by what are called Automated Valuation Models, or AVMs.

AVMs rely heavily on recent sales data to drive their valuation estimates. This works reasonably well in a vanilla market, one where home prices move uniformly in a single direction – namely up. Even rapidly rising prices are well accounted for, since liquid markets provide reliable, normal data sets upon which calculations can be made.

AVMs are a bit behind the curve in an appreciating market, offering a conservative estimation of a home’s value. But in a declining, choppy, illiquid market like the one we’re in now, AVMs fall apart.

As sales volume dries up and prices gap down, transactions that are even 3 months old become woefully out of date. Even in distressed markets that are now seeing frenetic buying activity, active listings — and therefore true market prices — are well below all but the most recent sales.

By using AVMs to value housing assets, banks are constantly underestimating losses in a declining market. Unfortunately, there isn’t much of an alternative.

Small, independent valuation firms offer the most reliable estimations of value, but they specialize in local markets by definition, which limits the scale with which huge lenders can effectively use their results to evaluate nationwide portfolios of loans.

Next time you laugh at Zillow’s estimation that a home that just sold for $250,000 is really “worth” between $315,000 and $375,000, remember that your bank is looking at the same data. No wonder they keep asking Uncle Sam for so much money.

This post first appeared on Minyanville.

Finally, housing is starting to act like a market searching for a bottom.

Well, sort of.

In former boom states like California, Arizona and Florida, distressed sales are driving the local real-estate markets. After a near-complete evaporation of buying activity last year, buyers have been brought off the sidelines by continued price declines, a glut of homes for sale, and low interest rates. Comparisons with last year are easy: Some areas are seeing activity up more than 300% year-over-year.

Many contend this is a healthy development, as prices return to more affordable levels and latent demand sops up overhanging supply. The bottom, they argue, is nigh.

However, even in areas seeing strong buying activity, median home prices continue to tumble. Banks and private sellers alike are finding the only way to guarantee a sale is to list the house below the market. This constant undercutting is pushing prices down, sometimes well below affordability levels derived from median income data.

This trend is not indicative of the capitulation most market watchers believe must happen before prices can truly bottom.

Capitulation is a concept more often reserved for equity-market analysis than for housing. Since real estate is vastly more fragmented and localized than stocks, housing trends take months, even years to develop, while equities can reverse course in a manner of days, if not hours.

Still, drilling down into individual transactions, evidence of capitulation in certain markets is becoming evident. Sellers, after 4 years of price declines, are finally throwing in the towel.

Homebuilders are becoming desperate: Toll Brothers (TOL) is trying to lure in buyers with 3.99% interest rates through a partnership with Wells Fargo (WFC). Centex (CTX) did them one better by offering rates as low as 3.25% (that rise to 4.50% after 2 years) and Pulte Homes (PHM) also offers a 3.99% fixed rate option for qualified buyers.

Banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), desperate to shed their growing inventory of foreclosed homes, are beginning to accept bids 10, 15 or even 20% below their asking prices.

And its not just banks. Just in the past few weeks, private sellers have started to jump at low-ball offers. Better to take less cash now than be constantly priced out of the market, chasing it all the way down.

Although this type of sale is still very much the exception rather than the rule, it’s an indication that sellers are becoming despondent, willing to accept any reasonable price to rid themselves of what could be months of headaches, upkeep expenses and deteriorating market conditions.

To be clear: This analysis is by no means a call that housing has bottomed, or is even remotely close to a bottom. It’s merely evidence that certain areas are closer to stabilization that others, and these signs — which may look like capitulation — should be viewed as a positive development in a market deeply in need of hope.

By RYAN TAYLOR

The Commerce Department reported a 14.7% drop in the seasonally adjusted rate of new home sales in December. Builders unloaded just 482,000 homes, the lowest number since 1982, while the median price slipped 9.3% from December 2007 to $206,500.

Tough to find a silver lining in this release, the numbers pretty much speak for themselves.

Homebuilders are literally drowning in their own supply, as ill-fated decisions to keep building through the early stages of the housing downturn are coming back to haunt the likes of Centex, Toll Brothers and Lennar. The data could not be more clear: Buyers are not willing to pay for new homes at their current prices. Nevertheless, the homebuilders, completely out of touch with reality, are begging Congress to pass legislation to encourage buyers to step back into the market.

With so many foreclosures in areas inundated with new construction, potential buyers are opting to pay far less for houses just a few years old, while the new ones sit vacant. Builders can’t lower their prices to compete at market levels, as the losses would likely put many out of business.

Which is exactly what needs to happen.

As I have written previously, there will be no bottom in the housing market — or even meaningful stabilization — until at least one, if not more of the major homebuilders goes under. The alternative, which would dramatically extend any future recovery, would be an auto industry-style bailout.

These unnecessary zombies of companies need to start feasting on one another before their industry can return to normalcy. The time for consolidation is now!

By AUSTIN NELSON

The National Association of Realtors released figures on existing home sales for December, showing an “unexpected” rise in sales volume for the month. Across the US, data showed a 6.5% increase in volume month over month. The surprise increase was bittersweet however, as median home price declined almost 3% month over month and were down 15.3% for all of 2008.

The Western region led both these trends last month, showing a 13.6% increase in sales volume and an 11.6% decrease in median sale price. Furthermore, in 2008 the West saw a 31.6% increase in sales volume and a whopping 31.5% decrease in median sale price. (Click here for more on median sales price figures compared to average prices.)

While this month’s data could simply be a small bump on the otherwise sharply downward roller coaster ride of residential real estate, in the West region at least it is indicative of a trend. As home prices “bottom” out or at least hit lows not seen in a decade, homes start to actually become affordable for the people who live in the area. Combine that with more favorable lending conditions and voila!, you’ve got an increase in sales volume.

This trend is even more accentuated the more you drill down to individual neighborhoods. We have seen neighborhoods in the San Francisco Bay Area that are seeing two fold increases in sales volume as prices reach affordable levels. Indeed, the further the drop in price, the more likely an increase in sales volume will be seen.

The important thing to keep in mind here is that prices are still continuing to drop even amidst the increasing volume. So even though your neighbor successfully sold his house in time to avoid foreclosure, you will likely end up selling yours for less. This is a result of the continued high levels of short sales and foreclosures that are flooding the market. Even with increases in buying activity and eligible buyers in the market, there are still enough properties for sale that the buyer can afford to be a stickler about price.

With that in mind, perhaps the most important number to watch is the housing inventory, which is simply a value calculated by taking the number of homes currently on the market and dividing it by the rate at which homes are being sold (seasonally adjusted, of course). This gives you the approximate time it would take to sell every home currently on the market (assuming the rate stayed the same and no new homes came on the market). That number was on the rise through the middle of last year but seems to have stabilized.

If this month’s data is an indicator of a future downward trend in inventory it could be the first true sign of improvement on the horizon. The question is, how far away is that horizon? And, given the current state of the US economy and banking system, will that improvement have staying power?

In the short run, savvy investors can take advantage of the increased liquidity in the housing markets by buying at a discounted rate and selling right back into the increasing demand. This will require careful analysis of the sales trends for a particular area as well as precise valuation of any property under consideration.

By RYAN TAYLOR

Just when you thought the market for new homes couldn’t get any worse, it did.

The National Association of Home Builders (NAHB)/Wells Fargo January builder sentiment index dropped to 8 from 9. While the homebuilders were setting records for new home sales in 2005 and 2006, they’re now setting records for the lowest confidence on record, as 8 breaks last month’s record low of 9.

The homebuilders are very clear on what needs to happen to bring back their confidence and revive the market for new homes (Hint: It has nothing to do with building homes that people want to live in for the right price.)

“Conditions in the nation’s housing market aren’t getting any better, and they aren’t going to get any better until the federal government takes substantial action to encourage qualified buyers to get back in the market.” NAHB Chairman Sandy Dunn said.

One of the biggest reasons we are in this housing crisis is that builders put millions of buyers in homes they couldn’t afford. Through questionable relationships and kickbacks, builders partnered with lenders to encourage buyers to stretch beyond their means. This common practice during the boom created a massive over-supply of homes which has yet to be worked through.

As a result, homebuilders are left with basically two choices – 1) offer homes at prices that are reflective of the current market conditions or 2) do not sell any homes and plead for Uncle Sam to help them.

Needless to say, they’re not going for option number one because it will put most of them out of business. Furthermore, the NAHB seems delusional on why people are not buying their homes.

“Qualified buyers are clearly in the wings but they’re looking for a significant signal from the federal government that now is the time to return to the market” NAHB Chief Economist David Crowe said.

This statement makes the assumption that qualified buyers are not in the new home market because the government needs to give them some kind of divine signal to know when to buy. As an alternative explanation, I think qualified buyers are not buying new homes because they’re far away from job centers, listed above market and were built by companies that frequently stop work on projects halfway through– existing residents be damned.

Until one of the major publicly traded home builders goes out of business, we are not near the bottom in the housing cycle.

By ANDREW JEFFERY

It should come as no surprise that with headlines screaming financial Armageddon and the stock market making new lows seemingly every day, last November wasn’t exactly a great month for the housing market.

This morning, the National Association of Realtors, or NAR, released its Pending Home Sales Index, which measures signed contracts that are expected to turn into sales. The data were abysmal, showing a 4% decline month-over-month to a reading of 82.3, the worst since the data has been tracked. Unsurprisingly, economists — who have been squarely behind the curve at each step of the ongoing financial crisis — expected a mere 1% drop, despite widespread turmoil in financial markets during both October and November.

Yet even with the continued slide in home prices, our good friends over at the NAR are optimistic for 2009 (Ahh to be a lobbyist and completely detached from any shred of reality). This outlook should come as no surprise, as the group has been wearing rose colored glasses since the housing downturn began in late 2005.

To counteract the negativity in their Pending Home Sales Index — which is inconveniently based on actual data rather than farcical forecasting — the NAR also released a report today predicting home prices will be flat in 2009. It even went so far as to forecast an increase in the median price of new homes.

The prediction displays the sheer audacity of a group whose very existence relies on convincing buyers its a great time to buy, irrespective of actual market conditions.

Despite an increase in buying activity in certain distressed markets, home prices are falling, and will continue to fall until supply and demand become rebalanced. This will not happen as long as homebuilders keep building, companies keep laying off employees and banks keep tightening lending guidelines.

And while it’s certainly beating a dead horse to say the decline in home prices will persist, sometimes the horse needs to be beaten.

Too many prospective buyers, eager to jump on attractive deals, will step in too early and be underwater (owing more on their house than it’s worth) almost immediately after the receive their new keys. This unenviable position traps a homeowner, making a job loss or other economic misfortune that much more dire.

There will be more than ample opportunities to buy houses on the cheap when prices have stabilized, and prudent buyers should continue to wait, save their pennies and let others, bolder yet perhaps less wise, catch the falling knife.