Sales of new homes dropped in May, surprising analysis who had expected a continued strengthening in US housing market data. According to Bloomberg, transactions fell 0.6% from April, but median prices decreased by just 3.4% from last year. This compares to a much bigger 17% year-over-year decline in existing home prices, as reported yesterday.

Data indicate that prices in the new home market are stabilizing, even as sales remain anemic. This is partly due to the fact that builders, having won reprieves from their lenders and extensions of credit agreements, have been unwilling to further discount prices and offer incentives to buyers. Uncle Sam took care of that, thank you very much, with generous tax rebates to first time buyers of newly constructed homes.

Indeed, upping that figure to $15,000 from $8,000 and doing away with income restrictions is now on the table.

As the government encourages more and more families to jump back into the housing market, it will increasingly seem like a great time to buy. And while some area are showing signs of returning to more healthy market behavior, the vast majority of markets are still trending downward. Opportunities are emerging, to be sure, but only to the savvy and well-informed buyer.

Interested in becoming one of those savvy and well-informed buyers? We are here to help.

Home sales in May rose from April, the second straightly monthly increase. According to the National Association of Realtors, or NAR, purchases crept up 2.4% from the prior month, which was less than 3.0% analysis were expecting.

Prices continued their decline, falling 17% from a year ago, dragged down by distressed sales.

As readers of this site know, we rarely have much good to say about the NAR. They are a lobbyist group, plain and simple, and typically put the interests of their constituents (Realtors) above that of buyers and sellers. But this month, the NAR hit the nail on the head with respect to the current home buying environment:

“The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan,” and “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales.”

Bingo. The new appraisal rules are wreaking havoc in the mortgage market, with loans disastrously hard to get thanks to inept appraisers and appraisal management companies. Coupled with rising interest rates, this does not bode well for the nascent housing “recovery.”

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.

By AUSTIN NELSON

In today’s fast paced, data-driven world, it’s easy to get lost in the morass of statistics flashing across our TVs and computer screens at a sometimes maddening pace.

Government officials, bankers, retailers and snake oil salesmen alike throw out statistical arguments at the drop of a hat, telling you why their pitch is the only one worth listening to because they have the data to back it up. But before accepting what you hear or read at face value just because some nameless research institute did a study, stop for a minute to ponder the complexities of even the most seemingly innocuous of statistics: The average.

Let’s first assume some particular data being quoted were reliably gathered and analyzed (This is almost never a safe assumption, but that’s a topic for another day), then examine how the average and another so-called “descriptive statistic” –- the median — are used in the data reports we see every day.

While on the surface it may seem that these two statistical measures could be interchangeable (indeed they are often used interchangeably with no explanation), they tell us very different things about the data they describe.

The median of a given group of data is its middle value. For instance, if your dataset has five data points and you lined them all up from smallest to largest, the third value would be your median. On the other hand, the average, or mean, of a dataset is determined by summing all values and dividing by the number of data points.

For example, suppose you are looking at real estate sales in a certain area within a certain time frame and you had the following 5 values: $300,000, $320,000, $320,000, $450,000, and $1,200,000. The median of this set is $320,000 (the middle value). The average is $518,000 (2,590,000 / 5). As you can see, even in this simple example, the two descriptive statistics are significantly different.

Real estate sales are often represented by the median value. The reasons for this are varied, but center around the fact that a few sales at extremely high levels (like that $2 million house on the top of the hill) can easily skew the average of a dataset towards those properties, even though most homes in the area are selling at lower prices.

For example, in Temecula, CA where most homes sell at modest levels (by California standards) but some homes sell for significantly more, the average sale price in 2008 was about $435,000. The median price, on the other hand, was around $359,000. That’s is a difference of over 20%.

Contrast that with areas where home prices are more homogenous, like Daly City, CA, where the average and median values are more closely in line. In 2008, the average sale price for Daly City was around $562,000 while the median was about $558,000 – a much smaller spread (<1%).

So which is better? Average or median? As can be seen from the examples above, neither.

Both display different aspects of the same set of data points. In Temecula, where median and average wildly diverge, using the average skews the data towards a much higher level. An individual from out of state looking to buy there might incorrectly assume they couldn’t afford to do so. On the other hand, solely looking at the median leaves out the fact that there are million dollar plus estates in Temecula available to buyers looking for that sort of thing.

When the National Association of Realtors releases their monthly sales statistics — which is the real estate pricing data carried by most major news outlets — they present sales price data as both median and average values. These values are used to track sales prices over time to identify trends in sales activity nationwide and regionally. While both median and average values are freely available to anyone with internet access, the median values are often the ones quoted in the popular press.

By focusing exclusively on median values, however, one can miss interesting trends.

For example, on a nationwide level and in three of the four regions identified, median and average home sale prices have been tracking at around the same relative spread since 2005. In the West region, however, the median sales price has been falling faster than the average price.

This widening variance helps tell the story of what’s been happening in Western real estate markets in the past few years. In most markets, high-priced homes have retained their value better than homes that are closer to, or below the median. Since so many lower end homes are being sold, many after foreclosure, the sheer volume of these transactions is dragging down the median figures. The average, on the other hand, is propped up by the few expensive homes still being sold.

This analysis then begs the question, why does the trend only exist in the West? As other regions decline, can we expect the same pattern to play out? Why are higher priced homes holding up better? If expensive homes begin to lose their value, what would that do to the median and average sales prices? What does the data look like on a city or zip code level?

It’s easy to see that just by comparing the median and average sales price trends, much insight — or at the very least another list of questions — can be gained.

I could go on all day about the wealth of information that such a seemingly simple statistic as the average can provide those with the patience and curiosity to “drill down” past the headlines. But my point is simply this: Pay attention! Don’t let the evening news or your favorite web news source gloss over the statistics to prove whatever skewed point they want to make that day. Spend the time to think critically about the information or you run the risk being fleeced regularly for the rest of your life.

At the very least, pay close attention to the source of any information you are receiving, particularly when that information comes in the form of a statistic. If you are being presented with a descriptive statistic like an average or a median, notice which one you are being given and pause for a second to think about why they used one and not the other.

Furthermore, if you notice that a single set of data is being described interchangeably by median and average, this should throw up a huge red flag as to the reliability of the information and its source.

By AUSTIN NELSON

Nationwide pending home sales were down 0.7% in October, according to the National Association Of Realtors (NAR). Pending home sales are those under contract but not yet closed, and the index is viewed as a predictive measure of actual sales that will occur the following month.

Month-over-month, seasonally adjusted data show the ongoing divergence in the real estate markets around the country:

• US: -0.7%
• Northeast: 0.6%
• Midwest: -4.3%
• South: 7.8%
• West: -8.7%

Year-over-year (seasonally adjusted):

• US: -1.0%
• Northeast: -14.1%
• Midwest: -6.8%
• South: -2.9%
• West: 17.4%

On the whole, a 0.7% drop in sales activity is a marginal change, not indicative of any huge changes in the market. Of the regional data, the most interesting is the West, where the index was down almost 9% month over month. The West had seen a sharp spike in home sales activity, a change that NAR had pointed to as a possible sign of a market bottom. This new data once again shows that the bottom calling was premature, as even the 27% year-over-year decline in median home sale price reported for October was not enough to spur a sustained rally.

While these declines were less severe than had been expected given how bad October was for the economy, they do not indicate a market stabilization: Prices continue to tumble. This trend will likely continue given the current employment situation nationwide. Furthermore, until credit becomes more freely available to the American homebuyer, few with steady jobs will be able to purchase homes. Expect further declines for the foreseeable future, especially as October and post-October economic events factor themselves into the housing market.

December data, which won’t be released until early 2009 will be interesting to watch, considering the federal efforts currently being undertaken to renew demand for housing. Refinancing activity has spiked in recent weeks as mortgage rates have been pushed down and the Treasury Department is considering a plan to give cheap mortgages to anyone brave enough to buy a house in this environment.

By AUSTIN NELSON

The National Association of Realtors (NAR) posted its monthly Pending Home Sales Index for September today, showing a pullback in the gains seen in last month’s report. The index, touted as “a leading indicator of housing activity,” is based on signed housing contracts. These contracts are not counted as sales but are taken as an indication of future sales data.

Specifically, the data show the following:

Month over month (seasonally adjusted)

• US: -4.6%
• Northeast: -16.8%
• Midwest: -0.7%
• South: -7.9%
• West: +3.7%

Year over year (seasonally adjusted)

• US: 1.6%
• Northeast: -9.4%
• Midwest: -3.1%
• South: -11.3%
• West: +39.5%

These monthly declines come following gains in August numbers (US up 6.5%). In last month’s report, the NAR pointed to the monthly figures as a sign of housing market recovery, but this month’s reversion evidences the continuing weakness of the market as a whole.

Now the polyannas at the NAR are choosing to focus instead on the year-over-year increase in the overall market, saying it indicates “we’re still in a broad period of stabilization.” However, the west region has shown a resurgence in sales and contracts are up almost 40% over this time last year, which is single handedly propping up the overall US numbers.

Taking the west out of the picture shows the US housing market as a whole continues to slide, where previously strong markets are beginning to show weakness in the face of continued economic crisis. The west is simply further along in the process of extreme market correction.

It is important to remember that this index should be taken with two very large grains of salt. The first is that these indices are based on housing contracts and do not represent completed sales. Fallout rates remain high, especially amidst a difficult lending environment.

The second, and more important, is that while sales volume may be stabilizing in some areas, sales prices are still unstable. With inventories continuing to hover at near record levels, downward pressure will still be exerted on home values.

Finally, unemployment data released today by the labor department indicate that unemployment is at a 14-year high of 6.5%. There is no reason to expect that this number will go down any time in the near future, as our economy is still locked into a death spiral of bad debt and tight credit.

This isn’t 2006 anymore, people who don’t have jobs don’t buy houses.

This post first appeared on Minyanville.

Put on those Rose-Colored glasses, it’s time again for the Existing Home Sales data:

• September sales came in 5.5% higher than last month, at 5.18 million (annualized) compared to estimates of 4.95 million
• Sales were 1.4% higher than last year — the first year-over-year increase in 3 years
• Inventory shrank to 9.9 months worth, from 10.6 months
• Median home price dropped to $191,400, the lowest since April 2004
• Distressed sales made up 35-40% of sales, with 80% of those going to owner-occupiers (higher than the usual 75%)

Per normal, the National Association of Realtors chief economist Lawrence Yun is as optimistic as ever. He gets paid to obfuscate the truth.

Per normal, the National Association of Homebuilders chief economist David Seiders is as pessimistic as ever. The worse it is, the better chance his group gets on the government dole.

It’s messy out there in housing land, but that’s not exactly news. Keep in mind that the year-over-year numbers line up against this time last year, when credit markets first seized up and home buying all but evaporated for a couple months. Easy comparisons make for premature bottom call.

Of all the myths we were fed about the housing market and its implications for the broader economy, there is no greater one than the spin that housing couldn’t possibly drag the economy into recession. Since the downturn started in the context of economic strength, the argument went, we were better positioned to absorb the fall in home prices. This couldn’t have been more wrong.

Traditionally, housing slowdowns are caused by economic problems, not the other way around. If delinquencies starting running up when times were “good” what would happen when things got “bad?” We are now finding out.

Markets that haven’t seen forced sales in decades could soon find out what it’s like to watch housing wealth evaporate at an alarming pace. Everyone knows Detroit, Stockton, Miami, Phoenix — these areas are in bad shape. But what about upper-middle class suburbs where people haven’t faced layoffs in years? These are the neighborhoods that are more worrisome, since their inhabitants have been largely insulated from the downturn thus far. Prices ran up just as far, albeit for slightly more fundamental reasons, but home values were inflated by fraud and loose lending just like everywhere else.

It is, unfortunately, only a matter of time before reality comes back home.

This post first appeared on Minyanville.

That glitzy McMansion you’ve always wanted may finally be within reach.

Or not.

If nearly 3 years of home price declines, historically low interest rates and a relentless media barrage of half-truths from the National Association of Realtors haven’t been able to stabilize home prices, it’s doubtful a gimmicky used-car-style sales event will do the trick.

Coldwell Banker, one of the nation’s largest real-estate brokerages, launched a nationwide campaign last Friday to boost the flagging housing market. The 10-day sales event aims to close the gap between buyers and sellers by offering up to a 10% discount on listed homes for, you guessed it, 10 days.

This selling bonanza was hatched in response to a recent survey of over 3000 of the firm’s real estate agents, which found that a majority feel listing prices are too high to attract buyers. The survey also showed almost 80% of the agents believe more appropriately priced homes are garnering more attention; apparently, you need a license to know people like to pay less for a house, not more.

Coldwell Banker’s president and CEO, Jim Gillespie, is confident the housing market may finally be nearing a bottom. He told our friends at Marketwatch: “Despite the difficult headlines regarding our overall economy, the residential real estate market has been showing several positive signs over recent months that could be signaling a tipping point.”

It’s unclear whether continuing price declines, historically high levels of inventory, tightening lending requirements or frozen credit markets are the “positive signs” he’s referring to.

Gillespie also believes the unprecedented sales event will encourage buyers to jump back into the market: “Because of higher inventory, buyers have more homes to choose from and they can take advantage of near historically low interest rates and affordability levels that are the best they have been in years.”

Yes, affordability levels are the best they have been in years: Much better than when the only way to get into a house was to lie about your income and take out an Option ARM with a 1% teaser rate.

About this time last year, homebuilder Hovnanian (HOV) tried a nationwide fire sale to flush out its bloated inventory. More recently, Lennar (LEN), Centex (CTX), and DR Horton (DHI) tried a similar approach with both land and homes – to no avail. The fundamental forces pushing housing prices down will persist, regardless of futile ploys aimed at tricking buyers into paying more than they should for homes.

To be clear: Being negative on the housing market isn’t exactly a contrarian position. Therefore, anyone claiming it’s a great time to buy – like Coldwell Banker and tens of thousands of real estate professionals around the country — clearly have their own reasons for doing so.

Real estate agents get paid to close transactions; whether their client receives (or pays) a fair price is a non-issue.

Commission expenses are borne by sellers, typically to the tune of 6% of the sale price. In California, where the median home price is still over $350,000, that’s $20,000 out of the pocket of someone who’s already seen his home’s value evaporate before his eyes.

The selling agent usually splits the commission with the buyer’s agent, a pay structure that gives both sides an incentive to not only focus exclusively on closing deals, but also to sell homes for as much as possible.

Coldwell Banker correctly asserts that many sellers have unrealistic expectations about their homes’ final selling price, and as a result keep asking for prices too high for too long. Their cute little sales event, however, is aimed more at earning commissions for their struggling agents than advancing true price discovery in the troubled housing market. If the firm truly had the best interests of homeowners in mind, agents would volunteer to take a pay cut to ease their troubled clients’ burden.

Gillespie, Coldwell’s CEO, claims the event will “help move the US real estate market in the right direction.” He’s right – home prices must continue to fall. Simple economics, the interplay between supply and demand, is driving most markets, as tens of homes sit on the market for every one qualified buyer. Until this overhead supply is worked through, prices will remain under pressure.

In some of the most depressed areas – Las Vegas, the California Central Valley, Florida and Phoenix – homes have reached or surpassed traditional levels of affordability. Unfortunately, there’s more to buying a home than just being able to make the monthly payments. With down payment requirements returning to pre-bubble levels, low interest rates are almost a moot point.

There just isn’t any economic rationale for buying if home values keep sliding.

Even if a borrower can afford the monthly payments, home price declines wipe out the tax benefits of writing off mortgage payments and risk putting the new homeowner in the paralyzing position of owing more than his home is worth. Buying a home today is almost like buying a new car: You’re upside-down as soon as you’re handed the keys.

Until there’s real, verifiable evidence that home prices have stabilized, buying a home remains a dangerous financial proposition. This is true in every market, not just the ones that make the headlines for mind-boggling foreclosure rates.

Renting is still the far more fiscally responsible option. Staring into the teeth of a recession, families should be making choices in the best interest of their financial security, not for bragging rights at cocktail parties.