Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.”
-Warren G. Harding, 1920, in accepting the Republican Party nomination for President.

There’s nothing like anonymous blog posting to bring out the arrogance in all of us. In any case, I find this guy’s analysis (linked below) more persuasive than yours. Note, this link is only one example of his posting, it takes reading for him awhile to get a full picture of the real estate market, and he’s been mostly spot on for the past five years.

http://www.calculatedriskblog.com/2009/11/existing-home-sales-distressing-gap.html

Owners of unsold houses have to drop prices in order for them to clear. If they take a loss, so be it. The assets do nothing sitting unsold on their books, and they will drop their prices. The only thing that will delay this process is promise of tax payer subsidies, which will serve to prop up prices, effectively serving as a transfer of wealth from the tax base to home builders/owners. This is what we’re doing – delaying (indefinitely) liquidation.

People who were unfortunate enough to purchase a home and keep it in the bubble ramp up are now likely sitting with a negatively valued mortgage: paying for a home worth substantially less than they paid. If these people can no longer make their payments (unemployment being 10.2%, at least), they will default. Some people may decide it’s better to liquidate, take the loss, and buy a home for a reduced price.

Others, who are just on the cusp of default, could be helped by legislation that make renegotiation of contracts more flexible. This mess is the consequence of a massive monetary pumping – there’s not much else that can be done.

This view is confirmed by today’s WSJ:
“The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery… Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.”
http://online.wsj.com/article/SB125903489722661849.html?mod=mktw

“So, there must be a specific reason why existing are picking up while new are not. The explanation seems to be that existing sales are up because of the significant number of distressed sales, while new homes generally are not distressed, or at least not nearly as distressed.)”

……It would be hard to get an interpretation more wrong…….there are still huge inventories of new homes in those states most affected by over building that developers are desperately trying to unload…..you need to take a few trips to NV, FL and CA……..I’m not sure what you mean by “underpriced sales”……do you mean sales at prices that reflect the general level of demand in a given market……house prices across the country have declined by about 27% since the peak but variances by market are considerable even within a state……for example prices in CA in the valley are down 35% while in west LA it’s probably only 5-10%……in my own state on the east coast they’ve fallen by about 18% but according to realtor contacts of mine they are now rising slightly and the pick up in volume this summer has been quite brisk…..obviously distressed sales are part of the picture but the real estate market is unquestionably on the turn

Put another way, existing sales are up because of people looking for bargains among cheaper homes, but otherwise, home sales aren’t going too well. Generally, these circumstances are not a sign of economic strength, but rather of a still weak real estate market, which likely indicates a still weak economy. (With all due respect, your theory doesn’t make sense: If the economy is generally reviving, it shouldn’t matter whether homes are existing or new (obviously certain buyers prefer new, others prefer existing, but generally, in terms of the supply and the demand, it shouldn’t matter to a buyer whether his purchase is from the existing market or the new market). So, there must be a specific reason why existing are picking up while new are not. The explanation seems to be that existing sales are up because of the significant number of distressed sales, while new homes generally are not distressed, or at least not nearly as distressed.)

That said, with new home sales up 10%, that’s pretty big. To re-cork the champagne because no one is building where there are ghost towns full of empty homes is a bit too much to ask. 10% up is a nice jump towards filling up those homes and then towards new ones.