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Are Rising Home Sales and Rising Consumer Confidence Tied Together?

The National Association of Realtors (NAR) reported this morning that existing home sales (including single-family homes, townhomes, condominiums and co-ops) rose 2.9 percent to a seasonally-adjusted rate of 4.68 million units. That beat the general concensus from economists, who expected a rise to only 4.66 million units.

The bad news? Existing home sales are still more than 3 percent below 2008 levels. The worse news? Housing prices are still dropping. The national median existing home price (for all types of homes) was $170,200 in April, which is 15.4 percent below the national median home price a year ago. Forty-five percent of sales are from distressed properties, including foreclosures and short sales, which continue to push down prices.

This sounds a little better than the news from the S&P/Case-Shiller Index, which announced yesterday that home prices were down 18.7 percent, year-over-year, and down 32 percent since the peak of the market three years ago in the 20-top markets it studies.

But hey, what's a few percentage points between friends?

NAR also announced that housing inventories are up 8.8 percent to nearly 4 million units. At the current sales rate, it would take over 10 months to sell all of the houses listed today.

According to NAR's chief economist, Lawrence Yun, the big (read: good) news is that repeat buyers have started to move back into the market, dropping the percentage of first-time buyers to about 40 percent of total sales.

Are repeat buyers moving back into the market because first-time buyers are buying their homes, creating a trickle-up effect? Or, are repeat buyers actually real estate investors who are purchasing single-family homes and condos as longer-term investments?

It might be a little of each. Two recent anecdotes:

#1: I received a letter this week from a senior and recent widow who had just bought her first home. She sent me a letter (which cost her $9.76 to be sure I would sign for it) asking if it was really true that she could cut her 30-year mortgage in half by making one extra payment each year.

(This formula, which I'll discuss in an upcoming blog, works, but only at much higher interest rates. At current interest rates, you'd need to make several extra mortgage payments per year to cut your mortgage term by that amount.)

When I called her on the phone (heck, she paid so much for the letter, that I figured the least I could do was call her personally), she told me how she had scraped together the down payment funds over a lifetime of working, how she had been dreaming of this for decades since she immigrated to this country from Eastern Europe, how her daughter helped her negotiate with the lender, and how she bought a HUD house. "It had been foreclosed," she said. (She was delighted to find out that she qualified for the $8,000 tax credit - and had no idea it was meant for her, too.)

#2: I recently heard from a real estate investor who started in this new career about 9 months ago. He teamed up wih a disgruntled doctor who had lost half of his 401(k) in the market meltdown last September and figured he should invest in real estate.

In the past 6 months, the real estate investor has purchased 15 properties, mostly for 10 to 20 cents on the dollar, and some for as little as $20,000. He puts in at least that amount into fixing up the place, and then rents it out for $800 to $1,100 per month. It's a no-lose formula and he estimates he's already booked several million in true equity once the housing market recovers, which he is betting it will. (How can you profit from foreclosures?)

Both the senior first-time buyer and successful real estate investor represent pieces of a recovering housing market. Both are achieving their personal American Dream. A few more like them, and we'll be able to call a floor to this housing depression - which should continue to pump up consumer confidence.

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