Surprisingly, home sales boom in sinking markets and fall in booming ones

The National Association of Realtors’ second-quarter home sales data shows something startling.

We’re entering a kind of real estate Twilight Zone. We are entering a phase where the states with the highest housing prices losses are now showing strongest sales and vice versa.

Many of the states with the best housing and job markets (Washington, Idaho, Oregon, Hawaii, North Carolina) have had the biggest drops in sales, and the worst markets, in terms of foreclosure rates and home price declines (Arizona, California, Nevada, Ohio and Florida), are now seeing the strongest sales. Home sales in the robust Washington state market fell 36.6% in the second quarter compared to the same period a year ago. During the same one-year stretch, home prices in the Yakima (Wash.) metro area increased by 8.9% -- the highest appreciation of any metro area tracked by the Realtor group. Home sales in Nevada increased 17.9% in the second quarter and home prices fell 23.6% in the Las Vegas-Paradise metro area.

To explain this phenomenon, it helps to remember that the credit crisis began one year ago. Last summer, the weakest housing markets, in Nevada, California, Arizona and Florida, were already seeing rapidly falling home prices and sales. But the stable markets in Utah, Idaho, Washington and North Carolina weren't. After the credit-crunch began in August, those markets suddenly began to flag as buyers found it increasingly difficult to secure mortgages.

At the same time, foreclosures pushed home prices so low in California, Arizona, Florida, and Nevada markets that they became more affordable and attractive for first-time homebuyers and investors. Sales in many of the weakest markets suddenly began increasing. I’ve heard anecdotally that some foreclosed homes are getting competing offers from investors and first-time buyers.