The number of Americans who bought previously occupied homes rose in August. But sales were driven by an increase in foreclosures, a sign that home prices could fall further next year and slow a housing recovery.
The National Association of Realtors said Wednesday that home sales rose 7.7 percent last month to a seasonally adjusted annual rate of 5.03 million homes.
That's below the 6 million that economists say is consistent with a healthy housing market - but slightly ahead of the 4.9 million homes sold in 2010. 2010 proved to be the worst year for existing home sales in 13 years.
Sales of existing-homes in the Midwest grew at a slightly lower rate of 3.8 percent in August, but was 27 percent above the rate experienced the same period a year ago. However, the median price in the Midwest was $141,700, down 3.5 percent from a year ago.
Foreclosures, tight credit keeping lid on growth
Homes at risk of foreclosure made up 31 percent of sales. That's up from 29 percent in July. Many are being bought by investors.
At the same time, activity among first-time buyers, who are critical to reviving the housing market, didn't budge. First-time buyers made up only 32 percent of sales, matching the July level. They normally make up 50 percent of home sales in healthy markets.
Many people are reluctant to purchase a home more than two years after the recession officially ended. Some can't qualify for loans or meet higher down payment requirements. Even those with good credit and stable jobs are holding off because they fear that home prices will keep falling. Home sales are also being hurt by a steep decline in first-time buyers
Since the housing boom went bust in 2006, sales have fallen in four of the past five years. Declining home prices and record-low mortgage rates haven't been enough to boost sales.
Most economists say home prices will keep falling, by at least 5 percent, through the rest of the year. Many forecasts don't anticipate a rebound in prices until at least 2013
The median sales price dropped roughly to $168,300 in August from July. A key reason was the rise in foreclosures and short sales — when a lender accepts less than what is owed on the mortgage. Those homes sell at an average discount of 20 percent.
Investors are taking advantage of the discounts. Their purchases made up 22 percent of all sales last month, up from 18 percent in July.
The high rate of foreclosures has made re-sold homes much cheaper than new homes. The median price of a new home is roughly 30 percent higher than the price for a previously occupied home — twice the normal markup.
Even homes that are under contract and near closing are falling apart at the last minute. Contracts were cancelled at a higher rate in August, with 18 percent of Realtors saying they had at least one contract scuttled. That's up from 16 percent in July.
The Obama administration is trying to expand a program that allows homeowners to refinance their mortgages. But economists say that will do little to help the depressed housing market.
Wealthy buyers are still purchasing homes priced at more than $1 million in the affluent Northeast and growing Midwest. And investors are scooping up dirt-cheap homes in the battered South and West for less than $100,000. They are specifically targeting foreclosures in hard-hit areas, such as Phoenix, Las Vegas and Tampa, Fla.