08/24/2009 05:12 am ET Updated May 25, 2011

Good News From The Housing Market?

The stock market reacted very favorably yesterday to, among other factors, housing numbers which revealed a 3d consecutive month of increased numbers of home sales.

But, when one pulls the curtain back on this statistic, there is still a tremendous amount of cause for worry.

What is happening in the housing market is this:

1) Transactions are increasing at the lower end of the housing price spectrum as bank dispositions, short sales and first-time buyers (buoyed by the Fed's $8,000 tax credit) dominate the market.

2) Buyers in this price range are comparing the costs of homeownership against the costs of renting and concluding, rightly so, that given mortgage rates, distressed housing prices and an $8,000 subsidy, they would be better off owning.

3) Housing at the higher end of the price spectrum is suffering. Sales are very very sluggish for a variety of reasons one of which is that the rental -- homeownership comparative analysis does not work at high prices.

The scariest fact about housing is that it has no valuation mechanism other than rental value. Other than speculative assets like commodities and DOT-com-like stocks, most financial assets are valued on a cash flow or income analysis. Whether the measure be interest, dividends or operating income, most assets are measured by the revenue they generate to the holder.

Rental housing can be similarly valued. Look at the gross rents a house can produce, deduct operating expenses (taxes, insurance, maintenance) and determine what the resultant, net operating income is worth. That is essentially what is happening at the lower end of the housing market as renters make intelligent decisions to buy instead of rent.

But, at the upper end, housing is only worth what somebody thinks it is worth. Not unlike gold (an analogy more apt during the housing boom), the price of non-rental housing will fluctuate as people's perceptions of value change. At the higher end of the price spectrum there is a huge difference between what sellers think and what buyers think. And this gap will not diminish overnight. Sellers have to understand that the game has changed. Buyers see the world differently today and until the expectations of sellers and buyers move closer, we will continue to have bad numbers at the upper price ranges.

Does this matter? Well it matters if we ever expect to see the number of transactions reach the levels they were before the bust (about 20% higher than they are now). And it matters because consumerism is 70% of GDP and when people with moderate to higher prices cannot sell, and feel generally poorer, they don't spend on lots of other items. So, for now anyway, whereas June's housing numbers are certainly welcome, they do not indicate great news for a large segment of the U.S. housing market.

Jim Randel is the author of The Skinny on the Housing Crisis (RAND, 2009) which was just awarded First Prize in a book competition sponsored by the National Association of Real Estate Editors.