I couldn't help but notice the screaming, above-the-fold headline this week in the SF Chronicle, Homes sales get lift, but lid still on prices. It sounded like nearly two years of a contracting real estate market was coming to an end.

The long slide in home sales may be nearing an end, but that doesn't mean prices are going to rise anytime soon.
...some people saw last month's unusually big surge as a sign the market may be bottoming out.

Any time the news media uses the term "some people" is a clue.
As it turns out, the article was not just misleading, it skirted the shaky edge of being an outright lie.

First of all, the article only discussed the local market. In the country overall, sales matched two decade lows. This is despite new laws that shifted the burden of lending onto government-sponsored agencies like FHA.

The fact is that sales are already above normal, and therefore unlikely to shoot upwards, while inventory has never been higher. More unsold homes means more downward pressure on prices.

A large part of the reason for this is because of skyrocketing foreclosure rates.

Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.

Lower-quality subprime mortgage delinquencies soared as high as 37 percent for mortgages originated in 2006, 4 percentage points higher than previous estimates, S&P said.

Subprime mortgages originated in 2007 saw delinquencies climb to almost 26 percent, 6 percentage points higher.

For a closer look.

As for the home sales numbers themselves, not everything is as it appears.

Of the sales, 37.7% (11,750) were foreclosure resale’s. Most of this 11,750 is from the bank REO stock, which is the ’shadow inventory’I always talk about. These homes are typically sold through real estate agents or large auction aggregators such as the Real Estate Disposition Corp (REDC). Bank REO sales are counted in the existing home sales figures released each month that gets the stock market so hot and bothered. Only a very small percentage of bank REO has been sold each month until very recently when the numbers increased dramatically.

These homes are being sold at massive discounts to the note amount and pose the real threat to home prices across the nation. All over the country, neighborhoods are being marked-to-market overnight due to REO stock being dumped that was never shown as part of the listed housing stock in the first place. At 37.7% of all sales, this inventory is quickly becoming ‘the market’ and is rarely accounted for in the ‘month’s supply’ numbers released each month by the NRA because it is not listed in the MLS in most cases.

Last month according to Foreclosure Radar, 22,324 homes were taken back by banks in CA. If there were 11,750 REO homes sold, this means that the ‘month’s supply’ figure is actually growing each month despite sales figures improving. If you back out the 11,750 from the total of 31,150 and just look at ‘organic sales’, there were more homes taken back than sold. It is a real problem when the headline sales number is growing and according to the MLS the supply is shrinking, but in reality the true inventory numbers are actually ballooning due to the bank REO growing faster.

The ultimate measure of how good an investment is can be measured in return on investment. When it comes to houses that means rent vs. price.
As it currently stands, houses are still not a good investment.