The National Association of Realtors (NAR) released some data today about home prices in the second quarter. The news was, in a word, ugly. The national median home price fell 15.6% year-over-year. Yet, home sales were only down 2.9% compared to the second quarter of 2008. Conventional wisdom says that home prices should be correlated to sales, but the decline in prices was much greater. So what's going on here?

In its report, NAR explains:

Distressed sales - foreclosures and short sales - accounted for 36 percent of transactions in the second quarter, which continued to weigh down median home prices because they typically are sold at a 15 to 20 percent discount; first-time buyers accounted for one-third of transactions.



When you have that large a portion of new sales selling at such a huge discount, it affects the entire average significantly. As a result, the median price decline should be understood as just that -- a reflection of prices. That's different from the homes' values, which may prove to be greater once distressed sales end. I would expect to see a spike in median home prices at that time, which would consequently not indicate a spike in values -- just that price is more accurately reflecting value.

That percentage of distressed sales is also pretty staggering though. The report notes that 4.76 million homes were sold. Using the proportion described above, that means 1.71 million distressed sales occurred in the second quarter. Clearly, the government's program to help distressed borrowers keep their homes is not having the impact it hoped for.

I spoke to Walter Maloney, NAR's Senior Public Affairs Specialist who noted a positive finding in the report. 26 metropolitan statistical areas showed price increases in the second quarter, year-over-year. That's an increase versus just 18 when you compare the first quarter of 2009 with a year earlier. Of course, for the second quarter the other 129 metropolitan statistical areas reporter lower median prices compared to 2008. So I'm not sure it's time to break out your party hats just yet.

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