The housing bulls have really started to run wild now. One of them planted this rose-colored story in Bloomberg arguing that consumer deleveraging points to happy times ahead for the economy. The only problem is that the deleveraging comes from defaults rather than any paying down of debts. And these defaults are destructive for an economy, not a sign of hope.

It’s a similar story with some of the other housing fundamentals. Cullen Roche rightly points out that the housing recovery, when viewed over a longer time horizon, looks completely pathetic, and the bulls are being overcome with recency bias. There’s upward movement over the past two years off an incredibly low bottom, and viewed against the historical average it barely looks like movement at all.

What’s happened in housing, as I’ve said repeatedly, is that banks have figured out how to make the system work for them, making the most of their ability to structure the market and maximize opportunities for federal cash. The best example of this is that this housing “boom” is occurring in an environment where home sale listings have dropped significantly:

The number of homes listed for sale in the U.S. fell 18 percent last month from a year earlier, and the time they stayed on the market dropped 11 percent, signs of a strengthening housing market, according to Realtor.com data.

There were 1.8 million homes for sale in September, down from 2.2 million a year earlier and more than 40 percent below the September 2007 peak of 3.1 million, according to the National Association of Realtors’ website. Properties on the market last month had been listed for an average of 95 days, down from 107 days a year earlier, Realtor.com said today.

You can call this a “recovery” if you want, but if there are 400,000 less homes for sale, it follows that, amid constrained supply, any increase in demand will cause prices to rise. The demand increase is coming from institutional investors scooping up homes to rent out. Low mortgage rates haven’t hurt, assuredly, but most of the mortgage activity is coming from refinancing. The investors pay cash for their homes.

There’s no question that refinancings are dominating this new found strength in the mortgage business. At Wells Fargo, refinancings were 72% of mortgage applications in the third quarter. And they’ve been high for the last year: 69% in Q2; 76% in Q1; 78% in Q4 2011. These numbers are right in range with the industry as a whole: Dealbook’s Peter Eavis says that based on data from Inside Mortgage Finance, 68% of all mortgages originated in the second quarter were refis [...]

To get the full answer, you have to recognize that consumer de-leveraging, un(der)-employment, and wage stagnation has left fewer and fewer Americans with the money for a down payment. Refinancing has costs, but they are microscopic compared to 20% of the value of a new home. What’s more, they produce immediate month-to-month cash savings. And borrowing from banks may still be a hassle, but things are marginally easier when the bank already has data on the borrower and the asset.

And of course, the big banks dominate the refi world, because they have cut off competition on underwater refis, in ways that even have the New York Fed nervous.

People aren’t selling their homes to “step up” into new ones because they cannot come up with the down payment. Banks are keeping other homes in their inventory off the market to structure supply. So prices, which are artificially derived at this point, does not necessarily account for sales. In fact, as we move out of summer, we are likely to see a sales drop. Sales in California fell 16% month-over-month in September, and it was even a 2.7% drop year-over-year.

If you look at the market as a whole without being seduced by the rhetoric, you’ll see this a bit more clearly.