Abnormal activity in markets usually signals impending correction or collapse. Take for instance the current financial crisis facing the United States and most of the world economies which started with the abnormalities in the housing markets. When a product or commodity is adjusted beyond what reasonable supply and demand dictates to abnormally high profits in short periods of time - it is a sure sign that something is amiss.  

A good example of this is the flipping of houses in short periods of time in recent years for abnormally high profits. When average GDP is at 4%, how does it make sense that you can buy a house for $500,000.00, hold it a year, and sell it for $600,000.00 (a 17% profit)? Such opportunities usually do not last for very long, as whatever is causing the abnormal profits usually runs it course and corrects itself.

Unlike other so called "bubbles" such as the Internet Bubble where entrepreneurs solicited investment money to gamble on their untested ideas in a new industry, thus simply redistributing money from one person's hands to another, the housing market collapse has farther reaching implications for the economy as a whole.

Most banks and creditors have historically regarded real estate as essentially the same thing as cash for valuation purposes. Financial institutions have relied on loans against real estate for income from interest charged and to bolster the net worth of their holdings.

The loans that were made to people that didn't have the means to pay them, essentially when the market collapsed made this "real property", that was the equivalent to cash, devalue. There is so much of this junk loan activity that when it collapsed it caused many major financial institutions and even giant insurance companies that never thought they would have to come through on their backing of these loans if they defaulted, to collapse, be subsidized or be purchased by the government.

What is the essential thing to realize is that much of the economic progress we have made over the last 5 or so years was based on false financial information originating from the individual borrower and lender and passed on throughout the financial markets by inflated profit, loss, and asset reports that everyone, financial institutions to the government, relied upon.  

The good news is that the correction has swung too far to the negative. When you see houses being sold for $1.00 in Michigan, and homes selling for lower than what the materials and labor in them would cost to rebuild, then there are great values to be had. Regardless of market conditions all things have an inherent value.

Taking advantage of that fact is the problem. The correction in the financial markets has tightened credit so much that unless you have cash reserves you may not have the ability to take advantage of the situation. Credit is so tight that even the auto companies have had trouble approving credit worthy people for car loans. With the stock market teetering on collapse at the all too critical 7500 point level (and as of 11-20-2008 it was only 56 points above that critical level) most people cannot rely on the market for other types of funding. The good news is that the markets will correct themselves, and eventually the financial markets will be healthier and stronger as a result. The question is will they learn from their past mistakes and hold the line on the greed that pushed these companies to fail in the first place? If history is any indicator, the memory of this will fade and the cycle will once again repeat itself.  

What does this mean for you today? As a buyer it means it's harder to get the credit you need to purchase a house, but you can buy much more house for the money and you have a much larger selection of homes to choose from. As a seller if you have owned your house for some time, it may not mean much more than it will take longer to sell your home. If you bought your home at the height of the housing market boom when it may have been grossly overvalued, you may have to take a substantial loss to move your house, and you may actually find yourself with a house that you are - to take a term from automobile sales - upside down on. You owe more than the home is worth making it more difficult to get out from under the difference in your loan’s payoff amount and what the home is worth in the current market.  

Now more than ever you need savvy real estate agents, brokers, and companies to help you when you are going to buy or sell a house in these turbulent and correcting markets.  

U.S. Home Resales Rose in September to One-Year High

Oct. 24 (Bloomberg) -- Home resales in the U.S. rose more than forecast in September, aided by foreclosure-driven declines in prices that made properties more affordable.

Purchases of existing homes jumped 5.5 percent last month to a 5.18 million annual pace, the highest level in a year, the National Association of Realtors said today in Washington. The median price dropped 9 percent.

The boost to sales from lower prices may be short lived as banks withhold financing on mounting concern that record foreclosures will hurt profits and depress values even more. The collapse in lending signals the housing recession will extend well into a fourth year.

``Buyers are having trouble getting financing,'' Terrin Griffiths, an economist at the California Credit Union League in Rancho Cucamonga, California, said before the report. ``The economy is showing increasing signs of weakness and the housing market continues to struggle.''

Resales were forecast to rise to a 4.95 million annual rate from a 4.91 million pace in August, according to the median estimate of 66 economists in a Bloomberg News survey. Projections ranged from 4.7 million to 5.11 million.

Sales rose 1.4 percent compared with a year earlier, the first year-over-year increase since November 2005. Resales totaled 5.65 million in 2007.

Today's figures compare with the 4.86 million level reached in June, the lowest in a decade and 33 percent down from the record reached in September 2005.

Distressed Sales

Foreclosure-related sales accounted for 35 percent to 40 percent of last month's total, the agents' group said. Of those, about 80 percent were for primary residence, higher than the average of about 75 percent and signaling that investors are not a primary reason for the jump, said Lawrence Yun, the group's chief economist.

``In terms of sales, I think we have bottomed out,'' Yun said in a press conference. ``The first step to housing-market stabilization is rising home sales. Hopefully, this trend can continue.''

The number of previously owned unsold homes on the market at the end of September represented 9.9 months' worth at the current sales pace, the fewest since February and down from 10.6 months' at the end of the prior month.

Inventories need to continue dropping in order to stabilize prices, and that will take more time, Yun also said. In the past, the Realtors' group has said a five to six month's supply represents a stable market.

Price Falls

The median price of an existing home dropped from a year ago to $191,600, the lowest since April 2004. Falling home prices make it harder to refinance mortgages, pushing up foreclosures in the third quarter to the highest since record-keeping began in 2005, according to Realtytrac.com.

Resales account for about 90 percent of the market, while purchases of new homes make up the rest. Sales of existing homes are compiled from contract closings and may reflect contracts signed one or two months earlier.

Today's report showed resales of single-family homes climbed 6.2 percent to an annual rate of 4.62 million. Sales of condos and co-ops were unchanged at a 560,000 rate.

Purchases increased in three of four regions, led by a 17 percent surge in the West as distressed sales jumped in California and Nevada. In the Northeast, sales fell 1.2 percent.

Less Equity

Declines in home equity have undermined consumer spending as owners have less cash to tap. A cascade of bank losses and failures has led to the most severe financial crisis in seven decades. Most economists are forecasting a recession in the U.S. and a global slowdown.

As home sales shrank, builders scaled back construction projects by 64 percent through September from a peak in January 2006, the biggest decline since at least 1959. Work began last month on the fewest single-family homes in 26 years, the Commerce Department reported last week. The number of building permits issued also fell, a sign that declines in construction will continue to hurt the economy.

``The housing downswing is really not exactly even nearing a bottom at this point,'' David Seiders, chief economist at the National Association of Homebuilders said Oct. 17 in an interview with Bloomberg Television. ``The core problem in the economy is still housing, and house prices are decimating the financial markets.''

Construction companies continue to struggle. Pulte Homes Inc., the third-largest U.S. builder, this week reported a net loss of $280.4 billion for the third quarter, more than double what analysts had projected.

``A bottom in the housing market may not come for some time,'' Chief Executive Officer Richard Dugas said on a conference call yesterday.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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