We woke up this morning to some good news on housing-pending home sales for the month of December were up 6%. This is great news on the surface for people looking for some kind of a bottom to form in the declining housing market. However, when we take the opportunity to examine these homes that are selling more closely, the message isn’t quite so positive for the housing market.

According to real estate website Zillow.com, more than 20% of the home sales during 2008 were bank owned properties. These are homes that had been foreclosed on, repossessed, and sold by banks desperate to raise capital instead of writing off these bad loans. On top of this, 11% of the home sales were short sales, or sales where the sale price was not high enough for the homeowner to pay off the mortgage. In all, nearly a third of the home sales for the year were in highly distressed properties. In all, more than 34% of the homes sold in the U.S. in 2008 were sold at less than their purchase price.

Home values have been falling since they hit their peak in 2005, but 2008, and specifically the last quarter of 2008, have seen trillions of dollars in home equity evaporate into thin air. Since its peak, the value of home equity the U.S. has declined by over $6 trillion, with $1.4 trillion of that decline recorded in the 4^th quarter of 2008 alone.

Almost 18% of homes in the U.S. are underwater right now (their value is lower than their mortgage balance), and even worse, more than 40% of the mortgages issued in the last five years are underwater. The worst city in America for this is Las Vegas, where, according to statistics, 61% of all homes are underwater.

This giant loss of equity means that borrowers are unable to access cash from their homes for repairs or living expenses, which is increasingly worrisome in the face of massive losses in the job market. We now find ourselves in a dangerous cycle for home prices. More foreclosures mean more inventory for sale, which lowers prices and hurts equity values even more.

It’s nice to see bargain hunters entering the housing market again and taking advantage of opportunities to buy at deep discounts, but we have a long way to go before we can declare that a bottom has been reached in the falling housing market.

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Tags: foreclosures, home values, housing market, mortgages

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