Home Sales Rise -- that's BAD news?!?

Apparently a contributor to MSN Money and I are not on the same, well, page. This is going to sound odd, but please glance at this article and then come back. My comments will make more sense that way. I promise.

The premise for the article in question is that a jump in home sales isn't necessarily a good thing.

Huh?

Southern California– arguably one of the hardest hit markets by foreclosures and falling values – is up 60%. That level of increase is more than banks trying to off-load foreclosures (as the aforementioned article would have us believe) -- homes are simply selling for current market value.

In other words, a good percentage of the Southern California homes being purchased are REOs (REO= a property bought back by a bank or lender after a foreclosure sale) simply because a good percentage of the homes in that market are REOs. The fact that they’re REOs is inconsequential; that people are buying them, there’s something to write ‘home’ about.

As far as the second page of the article – I don't know where the writer is getting any of that. This idea that once a bubble is pricked it doesn’t come back again just isn’t supported by history.

In the last 50 years nearly every peak was followed by an equal or greater peak within 10 years. The 1960 bubble popped and grew back by 1970 for the next bubble; there was a HUGE bubble that popped after 1980; it grew back even bigger by 1989; that one burst, leveled by 1994 and stayed flat for about 3 years before beginning the most dramatic climb we’ve ever seen.

So even if someone bought at that cycle’s absolute pinnacle they would recover within a decade. And not everyone bought at the absolute peak -- if they timed it just right and bought at the bottom they made a substantial return in only a few years and even if they bought too early they were in a much shallower hole and their recovery time was substantially less.

And by the way -- isn’t it good for home values to outpace inflation and income? We just compensate in other ways -- net proceeds from the sale of a home become our down payment when we buy up; underwriting guidelines change over time (within reason) to help (legitimately) compensate as well. And when it gets too far out of control, the market peaks and the system resets.


Let’s go back to the ‘40s and look at a similar housing cycle: from 1942 to around 1948 home values increased by probably 60%. Sound familiar so far? But when that bubble burst and home values declined, values remained well above the start of that cycle and that created a new plateau that led to future booms in the ‘70s, ‘80s, and the one we just experienced.

To make a short story long... I couldn't disagree more with the conclusions drawn in this article (in case you haven't picked up on that).

I think if you’ve already pre-determined your point, you can slant the data enough to make it work in your favor. But by doing so, you’re probably missing the point.

The reason for the change in momentum doesn’t matter as much as the change in momentum itself.

REOs today, private sellers tomorrow, new construction the day after that.