In 2006, I predicted the bursting of the real estate bubble would spread its problems into the financial industry and broad economy to create one of the worst recessions since the 1930s. In 2008, I said the problems began in the real estate industry and the eventual recovery will have to begin in the real estate industry.

On the surface anyway that seems to be happening.

Confidence among home-builders has been creeping up in recent months, although certainly still scraping along the bottom, with only 18% saying they see better times ahead. But that is better than the low of only 8% that expected better times ahead last winter. And when a turnaround begins it is not the level that is important but the reversal of the previous trend. (The confidence level probably won’t be at high numbers until housing is in its next bubble).

The increased confidence of home-builders shows up in the new construction they are undertaking, at least in the area of single-family homes. While overall residential construction declined in July, the actual decline was in multi-family apartment and condo construction. The number of new starts for single family homes rose 1.7% in July, and permits for future starts of single-family homes were up 5.8%.

Then, on Friday, it was reported that existing home sales jumped a surprising 7.2% in July, to its highest levels in almost two years. It was the fourth monthly increase in a row and significantly higher than the consensus forecast that sales would rise 2.2%.

If only the picture were as positive when you look behind the headline numbers that create the excitement. But, unfortunately, that is not the case.

For instance, in spite of existing home sales rising 7.2% in July, the inventory of unsold homes rose by 7.3% in July, as many more homes came on the market than were sold. That is not a sign that the housing crisis has bottomed.

There are also reasons to believe the sales increase of recent months is temporary, since to a significant degree they were artificially driven by the $8,000 bonus being paid to first-time home-buyers. The National Association of Realtors (NAR) reports that 30% of July home sales were to first-time home-buyers enticed by the bonus. Unfortunately, the bonus program expires November 31, and given the time it takes to close a deal the NAR says would-be buyers need to make offers by the end of September. So at the end of September, six weeks away, will that high percentage of home sales to first-time buyers, 30% of total sales, go away? One would think most of it will.

It is also not encouraging that 31% of July sales were of distressed properties, those in foreclosure, often bought at auction by speculators who intend to flip them back into the market later for a profit, and ‘short-sales’, in which the bank accepts a low-ball offer rather than put the property through the foreclosure process.

That leaves a discouragingly low level of sales that would be considered normal, sales at relatively fair value, with sellers not in a financial crisis, and buyers not subsidized by the temporary first-time buyer bonus.

There was also the discouraging news from the Mortgage Bankers Association (MBA), that the mortgage-delinquency rate rose to 9.24% as of the end of the second quarter, a new record, and that the combined rate of mortgages either delinquent or already in foreclosure rose to a record 13.16% of all outstanding mortgages. For sure, it is regional, much better in some states, much worse in others, but on average nationally, that’s a scary one out of every eight homes you walk past.

The MBA also noted another behind the headline statistic that is not encouraging, saying, “A year ago it was sub-prime adjustable-rate mortgages [which were being reset at higher rates] that were causing the problems. As a sign that mortgage performance is now being driven by economic problems like job losses, prime fixed-rate mortgages now account for one in three foreclosures. 

So I would be more encouraged by the rise in home sales if not for the reality revealed when you look behind the headline number; if it weren’t for the probable temporary aspect of the improvement; and if we could only see consumer spending picking up elsewhere, in case this improvement in home sales is a temporary aberration, and not a sign of the recession ending.

And no, I’m not talking about the spike in auto sales that will soon be reported as a result of the $4,500 ‘Cash for Clunkers’ bonus. That is also not normal buying. And the program expires August 24, even sooner than the first-time home buyer bonuses. The Cash for Clunkers has also been stealing auto-sales from future quarters, so it is also a potential false bottom.