What some expected to be a spring fling for the U.S. housing market turned into a white-hot summer.
The typical spring fling for the U.S. housing market is turning into a hotter summer, as home buyers return to the market with help from foreclosures, tax incentives and abundant supply.
Home buying and sales activity typically pick up in the spring as warmer weather boosts activity, but the momentum has continued into the summer, which some take as a sign of long-awaited stabilization in the hard-hit sector.
Improvement in this market bodes well for the U.S. economy, as it points to better demand in the sector where the first signs of the recession took root.
Seasonality no doubt helped improve housing sales in the spring, but I still think the worst is behind us, said Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business.
Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers have helped stabilize the market. Fisher said he does not expect further significant price declines, which should boost consumer willingness to purchase homes.
But with the tax credit set to expire in several months and distressed properties making up a high proportion of sales, the recent flurry of activity masks uncertainty about the long-term outlook.
David Crowe, chief economist at the National Association of Home Builders in Washington, D.C., said home builders have told him that the first-time home buyer tax credit is bringing in buyers.
I am concerned that although we do have some increase in demand and production, the momentum is not sufficient to get us past the expiration of the $8,000 first-time home buyer tax credit, and we could see some fall back after November when the credit expires, he said.
OUT OF THE HOUSING WRECKAGE
Nevertheless, this week's housing data suggests that the market is climbing out of the ashes of the three-year slump.
The National Association of Realtors said that sales of previously owned U.S. homes in July rose to an annual rate of 5.24 million units, the highest since August 2007.
Home builders have become more confident, with the National Association of Home Builders/Wells Fargo Housing Market Index rising to its highest point since June of 2008. And the Commerce Department said new housing starts for single-family homes are up five consecutive months.
Housing demand has picked up with help from deep discounts and a brighter economic outlook, which has helped clear inventory and allow builders to increase construction, according to Michelle Meyer, an economist at Barclays Capital in New York.
There has been a decisive upward trend in the seasonally adjusted data for the past several months, suggesting it is an actual improvement, she said.
However, the NAR said distressed sales -- foreclosures and situations where owners are forced to sell -- accounted for 31 percent of existing sales in July, and the home buyer credit also had a significant impact on sales.
While more sales are a welcome development, additional softness in housing may be expected because of what economists are calling shadow supply, homes that were kept off the market by owners electing not to sell in the real-estate downturn.
They may be ready to unload now, and with additional foreclosures on the way, this shadow supply should weigh on home prices and delay a recovery. This inventory may already be emerging, with the NAR noting a sharp increase in the inventory of existing homes for sale in July.
Late payments on U.S. mortgages increased to a record high in the second quarter, with almost one in eight homeowners delinquent or in the process of foreclosure, according to the Mortgage Bankers Association's National Delinquency Survey.
The NAHB's Crowe said the market should continue to see an oversupply of existing homes as more foreclosures come on the market, he said.
Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said she does not expect a strong housing market recovery, with foreclosures the biggest obstacle.
A rise in foreclosures will keep the housing recovery slow and weak, and will continue to place downward pressure on house prices until mid-2010, but at least the end is in sight, she said.
Still, Crowe said home builders are having problems obtaining production financing, and many are complaining that sales have been lost as a result of too-low appraisal values.
The obstacles are plentiful, he said.