Sales of existing or previously owned homes have been essentially flat since late last year, prompting suggestions that housing demand has already “stabilized.” But a large and rising proportion of existing-home sales are sales of foreclosed homes (or short sales) at fire-sale prices, especially in previously overheated markets where prices have fallen dramatically.

While it is good that many foreclosed homes are being taken off the markets, the foreclosure surge is hardly a sign of housing market vitality.

Competition from foreclosure sales actually causes major negative impact for the new-home market. In fact, new-home sales still are heading downward, falling by a whopping 11.5% in August to the lowest level since the depths of the 1990-1991 recession.

Furthermore, NAHB’s proprietary survey of 30 large single-family builders showed ongoing erosion of both gross sales (new orders) and net sales (accounting for cancellations) in August, on a seasonally adjusted basis.

In September, NAHB’s single-family Housing Market Index (HMI) went up a bit , rising two points from record lows posted in July and August, and the rise showed a better outlook by builders for future home sales.

The survey was taken before the events in financial markets after mid-September and it’s entirely possible that the HMI will fall back in their October survey.