The report for existing home sales came out this week and it surprised many observers by being positive. Sales in February were up by 5.1% over January. But this number is a little misleading. This is a month to month comparison, and compared to last February we are still down about 4.6%. The increase in sales is more of a seasonal factor than an unexpected surge in buying. Every year around this time, new home buyers start shaking off the winter doldrums and begin to look for new homes. Here in the Chicago area it is called the Spring Market, and a hefty percentage of the homes sold in the year occur between February and June. No matter what the economic conditions, there are a couple of big reasons why this happens like clockwork every year:

1. First time home buyers file their taxes and their tax return checks help give them the down payment they need to buy their first home, which starts the market rolling.
2. Many home buyers have families, and they want to make sure that they have bought, closed and moved in time to start the new school year in late August or early September.

So the uptick from January to February is just a normal part of the market. But one thing that isn’t normal this year is what home buyers are buying. According to the National Association of Realtors 40 to 45% of the home sales now are distressed properties, that is foreclosures or short sales. My experience matches up with what NAR is reporting, first time home buyers are the biggest factor in the market, and they are concentrating their searches on looking for bargains, and these bargains are the short sales and bank owned properties which are often priced at big discounts to similar homes in the area. As I’ve written before, this means that this won’t be a typical Spring market where first time home buyers buy at the low end of the market, giving move up buyers an opportunity to step up to the next level setting off a chain reaction of buying and selling. But the first step in getting the real estate market healthy again is to cut down on the inventory of homes for sale, and this means taking out the distressed properties first.

With the economy still slipping and unemployment spiking higher, loan defaults and foreclosures are likely to grow. But more is being done to slow the pace of foreclosures and work with struggling homeowners to help them stay in their homes. And the bad news for homeowners is great news for first time home buyers. Prices have dropped to the point where homes are the most affordable they’ve been in years. That combined with low mortgage rates and the $8,000 first time home buyer credit are making this a once in a life time opportunity for first time home buyers.

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