By S. MITRA KALITA And DAWN WOTAPKA

Sales of previously owned homes fell sharply in February, setting the stage for steep discounting in the spring market.

The National Association of Realtors reported Monday that existing home sales dropped 9.6%, and the median price, $156,100, was the lowest since February 2002.

The silver lining, say economists, is that bargain prices, coupled with low interest rates, might finally spur some buyers off the fence as the real-estate industry prepares for its busiest season. Even without the $8,000 federal tax credit that stoked sales last spring, industry watchers predict a larger number of transactions this year.

“The job market is getting better and that will make people feel more confident about their income-earning prospects,” said David Berson of the PMI Group. “You need that confidence to buy a house. Household formations are also very important. … Kids may have moved back in with their parents, or two people may have moved in together, because of job concerns. Now they can move into their own place.”

Still, Monday’s data painted a picture of pain and price declines that have spared no region.

“The housing market is still clearly years away from staging any meaningful recovery,” Toronto-based Capital Economics wrote in a note to clients.

February sales data due Wednesday are expected to show that the market for new homes is just as lackluster as that for existing dwellings.

Some builders of new homes are increasing discounts on residences and boosting commissions to brokers.

“They don’t do that if things are going well,” said Alex Barron, a home-builder analyst with the Housing Research Center, an independent sell-side research firm. “The level of desperation in the builders is just going to increase substantially in the next two months, which is the heart of the spring selling season.”

Overall, February’s weakness could have been driven by bad weather, deals canceled over lowball appraisals and a higher number of distress sales, according to the National Association of Realtors.

A third of transactions were all-cash sales, and investors accounted for 19% of February sales activity, down from 23% in January. Low prices in many markets also reflect a new reality as sellers finally give in and reduce the asking prices on their homes in hopes of a fast deal.

“After three years of the housing downturn, people are becoming much more realistic in terms of valuing their homes,” said Lawrence Yun, the National Association of Realtors’ chief economist.

In Atlanta’s upscale Buckhead neighborhood, Natasha Swann put her family’s five-bedroom colonial on the market about six weeks ago. The $1.6 million asking price won’t recoup the roughly $200,000 that Ms. Swann spent on renovations such as finishing the basement and adding a bedroom. Still, the 41-year-old mother of three is eager to sell because she is building a bigger house nearby.

After six showings, she is optimistic the home is priced competitively. “We had to be kind of aggressive” about making the price attractive, she says. “We don’t know where the market’s going, and I’m not going to wait a long time in an uncertain market.”

Economists say the number of distressed sales will continue to rise, and put pressure on prices. But mortgage rates, which were trending upward during the fall and winter months, have been falling in recent weeks amid global turmoil over the crises in Japan. Rates for 30-year loans were well below 5% last week.

“Few think mortgage rates are going lower,” said Moody’s Analytics chief economist Mark Zandi. “It’s more likely they will be 6% than 4% next spring. This lights a fire under buyers.”

Write to Dawn Wotapka at dawn.wotapka@dowjones.com

Seventy-eight percent of respondents believe housing prices will hold steady or increase over the next twelve months, up from 73% in January 2010; but almost two-thirds still believe the economy is on the wrong track, virtually unchanged (61%) from the beginning of last year.

The Fannie Mae Fourth Quarter National Housing Survey, conducted between October 2010 and December 2010, polled homeowners and renters to assess their confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system and overall confidence in the economy.

“Over the course of the last year, we gained deeper insights into Americans’ confidence in the strength of the housing market and the economic recovery,” said Doug Duncan, Vice President and Chief Economist of Fannie Mae. “More Americans believe that housing prices will remain stable over the next year. We are also seeing encouraging signs in the positive attitudes toward homeownership among younger Americans, despite the severe impact of the housing crisis on Generation Y. But most respondents to our survey continue to lack confidence in the strength of the economic recovery, and they are less optimistic about their ability to buy a home in the years ahead. This sense of uncertainty is weighing on the housing recovery today and reshaping expectations for housing for the future.”

Additional survey highlights include:

-Younger Americans, Hispanics and African-Americans are generally more positive about owning a home than the general population. Fifty-nine percent of Generation Y (ages 18-34) believes buying a home has a lot of potential as an investment, even though this age group suffered the steepest decline in homeownership during the housing crisis—from nearly forty-four percent when home prices peaked to under forty percent in 2009.

-More than one-third of Hispanics (34%) and African Americans (35%) say they will buy a home in the next three years, compared to only one in four (23%) of all other Americans.

-The percentage of Americans who believe that buying a home is a safe investment declined to 64% over the course of the year, from 70% in January 2010. This is down sharply from a similar survey conducted in December 2003, when 83% of the general population thought buying a home was a safe investment.

-During 2010, survey respondents increasingly expressed a strong belief that it will be harder for future generations to obtain a mortgage. Three-quarters of those surveyed (74%) believe it will be harder to get a mortgage in the future, up from just over two-thirds at the beginning of 2010.

-One out of three delinquent borrowers continues to say they have considered defaulting on their mortgage. However, that number fell from 39% at the beginning of the year to 31% in the fourth quarter. The number of delinquent borrowers who say they have seriously considered defaulting has also declined, from 25% in January 2010 to 19%.

For more information, visit www.fanniemae.com.

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Warren Buffett seems to have a positive mindset about housing… Read more

The housing market still looks pretty bleak: There were a record one million foreclosures last year, home prices are still falling in many regions and the number of “underwater” properties is at a record high.

And things don’t look much better in other areas of real estate. The number of construction jobs continues to decline, even as other parts of the economy have added jobs. And mortgage rates have moved higher as long-term Treasury yields have backed up during the past few months.

Basically, the real estate market remains a mess.

Real estate encompasses a wide range of markets – homes, apartments, hospitals, office buildings, strip malls, dormitories and other properties. But for our purposes, let’s focus on residential real estate, or homes. Here are four reasons to think residential real estate might represent a bargain – with one big caveat.

Everyone hates homes.

Homes are probably the most hated asset class in the country. That’s what happens when a bubble bursts. People avoid thinking about the value of their home. Sellers moan about no offers, buyers gripe about impossible lending requirements.

Hatred of an asset is often the precursor to contrarian interest, and being contrarian is at the heart of many investment strategies. To paraphrase Warren Buffett, be fearful when others are greedy and greedy when others are fearful. Mr. Buffett backed that idea when he invested in the stock market in the teeth of the financial crisis in late 2008 and early 2009.

Of course, being contrarian for its own sake isn’t wise investing. Gold was hated for years (“dead money”) before it recently became an attractive asset class. Still, a lot of smart ideas begin with the question: What does everyone hate?

Smart people are buying real estate.

This cohort is led by John Paulson, the hedge-fund manager who made $20 billion betting against the housing bubble. Last fall he said in a speech: “If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

Why is Mr. Paulson so adamant? Because he believes long-term interest rates are not going to get much lower. They have, in fact, risen since he gave that speech, but they remain remarkably low by historic standards. Low rates and the expectation that home prices will rise is his argument. For his part, Mr. Buffett has predicted the housing market will bottom this year.

Real estate performs well during inflation.

There’s no inflation these days, but when buying a home one should take a longer view. And the longer view shows that the economy has enjoyed a disinflationary period since the early 1980s. A number of folks think that cycle is slowly reversing itself.

If that’s the case, then convention would argue for holding assets that do well in an inflationary environment. That includes Treasury Inflation Protected Securities, commodities and real estate. Remember that during the stagflation nightmare of the 1970s, real estate had a strong run.

Inflation isn’t a significant issue in the U.S., but it’s a growing problem elsewhere. China and India have taken steps to fight inflation, the euro zone is getting flickers of inflation and the U.K. has had oddly higher prices (above 3%) for an extended period of time. If the cycle is slowly turning, real estate makes more sense.

Demand may be coming back.

Supply isn’t as out of whack as it used to be. At the end of November, home builders reported 197,000 new homes on the market, the lowest level since 1968, according to Yardeni Research. The National Association of Realtors reports that the inventory of existing homes for sale fell 4% to 3.71 million homes, which represents a 9.5-month supply at the current sales pace, down from a 10.5-month supply in October.

Those aren’t pretty numbers, of course, but they are moving in the correct direction. And that may be a reason that many home builder stocks, such as KB Home ( KBH: 15.28*, +0.49, +3.31% ) , Hovnanian ( HOV: 4.57*, +0.13, +2.92% ) , Pulte ( PHA: 23.95*, +0.05, +0.20% ) and Toll Brothers ( TOL: 20.47*, +0.15, +0.73% ) , have come off their lows in the past several weeks.

It’s all comes down to jobs. There are a zillion caveats to any positive home thesis, but the big one is unemployment. If the economy is not creating jobs, the chance of a rebound in housing is diminished. It’s hard to buy a home without a job, and folks who aren’t working don’t want to take long-term risks.

The job market is still struggling and the debate is hot about when it will recover. Optimists see recovery this year. Pessimists see pain for several years ahead. How this X factor gets resolved will say a great deal about whether housing will rebound.

Dave Kansas (Author Archive)

Read more: 4 Reasons to Buy a Home Now – SmartMoney.com http://www.smartmoney.com/personal-finance/real-estate/-1295050347411/#ixzz1BzCZpinH