Possible Bottom for Housing Prices?

New home sales moved up in September, and that was a positive sign that housing prices may be finally finding a floor. Recent data shows both encouraging and worrisome indicators related to a possible housing bottom, but the only certain thing in today's economy is that nothing is certain.

Sales of new homes recorded an unexpected increase in September, as median home prices dropped to the lowest level in four years. The Commerce Department reported a rise of 2.7 percent in purchases of new single-family homes, despite the fact that most economists had expected a substantial drop in sales.

Housing prices attractively low

The improved home sales can likely be attributed to attractively low housing prices, as the median price of a new house on the market is down almost 10 percent from last year's levels.  That means that new homes are cheaper than they have been since the end of 2004. Other encouraging news for housing prices also came in the form of a report that home sales of existing houses also rose.

In September, they climbed by 5.5 percent, racking up the best monthly gain in more than five years, and giving real estate professionals reason to become genuinely optimistic about a possible housing bottom.

Pending sales on the rise

The National Association of Realtors says that the number of sales pending grew from July to August, and that is yet another piece of good news for the housing market.

The good news was met with restraint, however, because it was based on statistics that were compiled before the stock market crashed in October. Until economists have more time to verify a pattern of gains, it's probably premature to start talking about reaching a valid housing bottom. Any positive news is welcome at this point, though, and with interest rates low, and both new and existing homes available at fire sale prices, buyers are definitely paying attention. Sales rose by more than 22 percent in the western part of the country, where some of the steepest price declines have been recorded.  They also improved in the south.

Sign of good things to come

Perhaps the most important signal of a potential housing bottom is that the inventory of unsold homes seems to be shrinking. Builders are continuing to cut back on the number of homes they build, in an effort to eliminate some of the burdensome excess. Their strategies are helping, because within the past couple of months, the nation has seen the fewest number of new single-family homes in 26 years, as the volume of permits to build fell, indicating future shrinking of the construction sector.

But new foreclosures are coming online every week, and that could offset any shrinkage in the number of listings. To add insult to injury, housing prices are so low compared to a few years ago, that 7.5 million homeowners owe more on their mortgages than their homes are worth.  That could translate into more foreclosures flooding the market.