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Home Sales Up 10%, But Market Still On Shaky Footing

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The National Association of Realtors said existing home sales increased 10% in September, but subdued prices and ongoing scrutiny over the foreclosure practices of America's largest mortgage lenders make it likely the housing market is still scraping along the bottom.

September's seasonally-adjusted reading showed 4.53 million existing home sales on an annual basis, up 10% from August's tally of 4.12 million, but 19.1% below the 5.6 million sold in September 2009. The median price tag was $171,700, down 3.3% from a month ago and 2.4% from last year. Distressed sales accounted for 35% of all sales in September.

"This is the biggest monthly gain in 28 years, even though we should be closer to 5 million [monthly home sales] given the rate of population growth," says NAR spokesman Walter Molony. "Buyers are responding to low interest rates, but what hurts is the anemic pace of job growth," he explains.

The NAR's gauge of existing home prices bottomed in February at $164,600, then rose until reaching $183,000 in June. The figure has since fallen for three straight months, and the latest decline comes amid the latest turmoil in the market over whether banks properly followed foreclosure processes. The uproar sparked several firms to temporarily halt foreclosures and on Monday, Federal Reserve Chairman Ben Bernanke said regulators are "looking intensively" at foreclosure procedures to determine "whether systematic weaknesses are leading to improper foreclosures." GMAC, Bank of America , JPMorgan Chase and Wells Fargo are among the firms that have seen their procedures called into question.

The possibility of a federal foreclosure moratorium could cause "potential disruption" in the housing market. Molony says a freeze in foreclosures could have the potential of substantially affecting prices and inventories, as holding back homes that would likely be on the market at lower price levels would temporarily raise home prices. Once a moratorium was raised, it would lead to a flood of cheaper houses entering the market, depressing prices further.

"Foreclosures have been coming in at a steady pace, and they get sold off quickly, but a recent survey we conducted showed that 23% of realtors had clients that didn't want foreclosed homes because of fears concerning the process," Molony says.

Though inventories are still quite high, up 8.9% from a year ago, they have been falling on a monthly basis and were down 1.9% to 4.04 million, or a 10.7 month supply, in September. "We are hoping for a decline [in inventories]; flattening prices indicate we won't go much lower, we think we will be seeing the market gradually pick up next year," says Molony.

HSBC analyst Kevin Nolan is not as optimistic. "A rise in inventory tends to precede price declines by about six months. Since the inventory started rising roughly eight months ago, it's no surprise that the median sales price recorded a 2.4% year-over-year decline this month. That follows an 8.0% decline in September 2009," says Nolan.

"The weakness in the housing market presents a clear risk for the US economy going forward," Nolan continues. "If house prices keep falling, more homeowners could find themselves with mortgages that exceed the market value of their properties [which] could dampen consumer confidence further and worsen the foreclosure problems currently affecting banks."

Aside from the foreclosure issues, banks are also facing possible consequences from the mortgage securitizations that accelerated until the housing market crumbled. A group of investors including PIMCO, Blackrock and the New York Fed pushing Bank of America, to repurchase loans that were tied into $47 billion worth of mortgage-backed securities.