Earlier this week, a headline in the Washington Post read: "Rise in home sales may show a stabilizing market." Indeed, after the awful July numbers, home sales are expected to have risen slightly in August. We'll know later this week, but for now increasing mortgage applications for purchases suggest just that. But even as home sales rise modestly, where might they be stabilizing?

One way to attempt to back into this number is to look at mortgage purchase application data provided by the Mortgage Bankers Association. If anything, this probably provides an optimistic view, since not all applications ultimately lead to a sale. How has this changed since the buyer credit expired? Here's a chart for April through September:

mortgage apps 2010-09-17.png

In June, the average monthly index value was 31% lower than it was in April. Existing home sales reported by the National Association of Realtors were down 32% in July from their buyer credit induced peak in May, which makes sense if you assume a lag to close. Similarly, new home sales were down 32% from April to May, as the lag isn't accounted for in the Census data.

Let's pull things forward to September, where sales are supposedly stabilizing. The average index for mortgage purchase applications in July fell again, another 2%, but it rose 3% in August. For the past two weeks, however, the index has declined. It fell back to its lowest level since August during the week ending September 17, 2010.

What does this mean? If the housing market is, indeed, stabilizing, it's doing so at a very, very low rate of sales. If the latest reading is approximately where the index will remain throughout 2011, then we can back into the pace of sales. Currently, the mortgage purchase index is 29% below its April average. That suggests existing home sales will have an annual pace of 4.1 million and new home will sell at a rate of 292,000.

Prior to May's plummet after the buyer credit expired, these levels would have been the lowest in decades. So if this is where the market is stabilizing, it's hardly reason for celebration. If you take the paces of existing home sales and divide by 12 for a monthly rate, you get just 340,000. Similarly, around 24,333 monthly new homes sales can be estimated.

How does this compare to inventory growth? Using NAR data, you can find that a 12-month average of 448,000 existing homes hit the market each month. And you can add to that the 49,833 new housing starts each month, based on August data from the Census Bureau.

So approximately 497,833 homes will hit the market each month while just 364,333 will be sold, making for a net gain of 133,500 homes per month in additional inventory. Unless banks find a way to manage inventory even more aggressively to prevent homes from hitting the market, housing prices will likely fall. And there's must be a limit to how long banks can realistically wait to foreclose and keep such additional inventory in the shadows.

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