Sold SignNew home sales stayed flat in August, a modest miss from expectations. Still, new home sales are on track for a 16% increase year-over-year. This still puts annual sales at the third-lowest on record, but it’s a boost from the bottomed-out years of 2010 and 2011. The recovery is sluggish, but it’s moving in an upward direction.

More analysts are excited about the continued increase in home prices, designated by the Case-Shiller index released yesterday. They particularly point to prices at the low end:

Luxury homes lost less value in the housing crisis and began to rebound more quickly, but lower-price homes are catching up, rising slightly faster in value than homes in the middle and upper tiers, according to an analysis of the Case-Shiller data by Patrick Newport and Michelle Valverde of IHS Global Insight, a private research firm in Lexington, Mass.

The typical lower-price home rose at an annualized rate of 1 percent from June to July on a seasonally adjusted basis. The middle tier posted a one-month gain of 0.4 percent, and the highest tier inched up by 0.1 percent.

In the last three months, Mr. Newport said, the lowest tier has been rising in value more than twice as fast as the other two categories. For the least expensive homes, “prices just shot up too fast on the way up and then went down more sharply,” he said. “We’re seeing the correction from that.”

Some have even spun this into a rise in consumer confidence, which looks more correlated with the election than anything else.

I just think it’s important to provide some context. Most housing analysts look at the numbers (all of which have a high margin of error related to them) and slice them and dice them without accounting for who is buying homes, for what purpose, and under what standard. And it’s clear that, when you step back and look at what’s driving the market, you have two factors. OK, I’ll be charitable and say three. One, more people have jobs than they did in 2010 and 2011. It’s not much, but it’s more. So that’s more people with the capacity to purchase homes, which has led to a modest increase in demand. This is the smallest factor.

The second factor is the continuation of the artificial suppression of supply. With supply constrained, in this market you have slightly more people looking for far less homes. Therefore you get price increases. That’s not really that hard to figure out.

The third factor is the speculative bubble being inflated by mass purchases from institutional investors like hedge funds and private equity firms. This comes mostly in the area of foreclosed properties and distressed home sales but on prices, the bidding up crosses over to increase non-distressed sales as well. It’s very clear that this has been going on for at least a year, and the sales will continue, boosting the existing home sales charts. All the low-end moves in the market are coming from this phenomenon. Just take a look at this revealing paragraph from that optimistic story on Case-Shiller home prices:

“Houses are going on the market and within a day have multiple offers already on them,” Mr. Graham said, adding that most of the offers were from investors who did not need financing. “It’s more or less a heartbreaking market, because you get your heart set on a house, and then someone walks in with cash.”

The only thing this doesn’t totally encapsulate is the new home sales chart, but we’re really only talking about an increase of around 5,000 sales a month throughout the country at this point. It’s not something to get super-excited about. New home sales were down in June and flat in August. We just see a few more sales.

I’m all for increases in prices helping people climb out of negative equity. The wealth effect from people seeing their equity return, and the potential spike in construction with increased demand, could all conspire to help the economy. But the underlying factors here bear a lot of scrutiny, particularly these bulk sales to investors. I find them to be extremely dangerous for a number of reasons. But analysts high on the recovery don’t want to talk about it.

Photo by AKZOphoto under creative commons license