New Home Sales Boom, Foreclosures Loom

The boom in new home sales does not show a healthy housing market that's ready to leap forward. After all, there are still roughly 6 million properties out there teetering on the brink of foreclosure, according to a recent report about the Home Affordable Modification Program.

Instead, the high number of new home sales shows that our sick housing economy is responding to the shock treatment the federal government gave it: the $8,000 homebuyer tax credit.

First, the bad news. If you're trying to sell a house, it's too late to catch the demand for the federal homebuyer tax credit. To claim the $8,000 tax credit, most homebuyers had to sign a contract by April and they'll have to close the sale by June. So the people coming to your open house this weekend probably no longer qualify. (The exception: Some members of the military or other U.S. employees who have been overseas.)

But we're probably going to be reading about the high demand for housing most of this summer, as homebuyers who signed contracts this spring close the deals to buy their homes in May and June. The monthly new home sales reports will come out a month later. Those reports will likely make banner news headlines through the end of July.

Next, some more bad news. Even though the number of home sales is high, home prices are weak. The Case Shiller Home Price Index for March is flat or falling, depending upon whether you include the standard adjustment for the season -- but it certainly isn't going up.

Home prices are weak largely because of the huge number of distressed properties for sale that have been through foreclosure. Distressed home sales made up nearly a third of all home sales in the U.S. early this year, according to a report from First American CoreLogic. Properties that go through a foreclosure auction or a short sale usually sell for much less than the usual price. A large number of distressed sales will bring down property values for everyone in a housing market.

Foreclosure actions are expected to stay high all year "as lenders systematically work through the backlog of distressed properties," said James J. Saccacio, chief executive officer of RealtyTrac.

Finally, here's the good news: We are dealing with our problems. And as banks work through that backlog, many of those homes are finding buyers, even if the prices are low.

What could possibly be worse that a flood of foreclosed homes that sell at cut-rate prices, dragging down prices for new homes and existing homes alike?

Easy: A flood of foreclosed homes that don't sell at all.