June 22 (Bloomberg) — Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.

Now, this is the BoomBustBlog version from March of this year where I made it crystal clear that housing will fall further and significantly. The government incentives are just market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest

Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”...

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Come 2011, the effects of the government's attempt to usurp market forces have nearly completely worn off and housing stock is in free fall - exactly as I proclaimed in 2009 and 2010 - free fall in an incessant search for equilibrium. Said equilibrium is nowhere near where we are now.

My very first post, the one that created BoomBustBlog, back in 2007 warned that the residential and commercial real estate bust was not only just getting started, but would continue for quite some time. I was dramatically more bearish than the Street and the mainstream in general. Reference The Real Trend in US Housing Prices… Sunday, September 2nd, 2007. In that post I made clear that although the Case Shiller index looked bearish, it failed to capture the worst parts of the residential bust. Well, fast forward 3.5 years later and the story still stands, even more exaggerated.

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Looking at the basic precepts of residential real estate valuation, there is no real reason why prices should not continue falling. As indicated in the Bloomberg video below, nearly every factor that you can plug into the valuation equation is negative. In addition, the recent fraudclosure issues significantly exacerbate the problem.

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Here, you have the most recent snapshot of the Case Shiller index. As you can see, it is the quintessential picture of a bubble gone bust. Notice the upticks throughout 2009 and 2010, the results of incessant .gov bubble blowing. Many truly believed that was the marked turnaround in the real estate market. Those who believed so did not study their history nor their spreadsheets. Plug in the numbers, and you will see that there is no empirical reason for housing prices to go up when they are still too richly priced to begin with.

This is an interactive version of the chart above. Use the slider at the bottom of the chart to alter the time frame graphed...

[iframe https://spreadsheets.google.com/pub?key=0Ai5WJsM3KjltdFlpZ1JUZXJIMWxfWHNHZWxrMDl2MXc&hl=en&single=true&gid=1&output=html&widget=true 500 450]

Please take into consideration that I believe things are actually going to get worse, for the shadow inventory buildup has been exacerbated by the foreclosure issues. All paying subscribers should review Foreclosures & Shadow Inventory. Shadow inventory not only hides the true condition of the housing market, it allows banks to hide the true nature of profits from said housing stock. More on that in our next post which will contain a current update of the shadow inventory and foreclosure backlog numbers.

Teaser to our upcoming foreclosure research

Related links:

• I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Monday, January 17th, 2011
• Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011
• As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibrium Scraping Depression Levels Tuesday, December 28th, 2010
• The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Wednesday, November 10th, 2010
• The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
• Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
• Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium
• Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
• The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
• Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
• I Told You Housing Was Going to Take a Downturn for the Worse. I’ll Tell You Something Else, We Are in a Housing Depression! It’ll Get Worse Until Market Forces Rule Over Government Bubble Blowing!

Interested readers can follow me on twitter, peruse my Residential Real Estate postings and/or my Commercial Real Estate opinion and research. I will be lecturing on this “realistic” viewpoint of real asset valuation and the outlook for 2011 as the keynote speaker in both New Amsterdam (Harlem, NY) and Amsterdam (the Netherlands).

See www.seminar.ingref.com.