Glimmers of Hope, but the Pain Lingers

With housing prices falling and mortgage interest rates rising, it's hard to say the housing market has bottomed out.

And, yet, there are some reasons for a more optimistic housing forecast, according to Mark Zandi, chief economist for Moody's Economy.com and author of "Financial Shock." The bottom is coming into view, he said in a recent interview.

"The home sales data suggests that demand is stabilizing," he said. "Since last year, new- and existing-home sales have stabilized. It's not going up, but it's not going down either. About half of the existing sales are distressed foreclosure or short sales, and that's part of finding a bottom. I view that as therapeutic."

Zandi said builders have gotten control of their inventory, which is down from the peak earlier this year.

The second step in calling a bottom to the housing market crisis is related to property prices. Zandi believes housing prices will fall an additional 5 to 10 percent, forming a bottom at around 40 percent below the high, set several years ago. But it could take until spring 2010 to get there.

"Most of the price declines are occurring now, but we'll see a big decline this summer. We will see foreclosures surge," which will bring housing prices down further, Zandi said.

Thanks to the decline in housing prices, housing affordability is at the low end of average right now. But a sudden jump in interest rates could turn that around.

"If fixed interest rates rise above 5 percent for very long, it will be a problem in terms of the housing market recovery," he said. "Hopefully the Federal Reserve steps on the accelerator and gets rates back down."

But there is one area that worries Zandi: loan modifications. "The president's loan modification plan has to kick in soon, otherwise all this optimism with regard to the end of the recession and housing market will be misplaced," he said.

Zandi said policymakers are working on adjustments to the current loan modification plans, including adding cash incentives for second-mortgage holders willing to modify loans and for borrowers who pay these new loans on time for a period of years.

"If you look at the administration's loan modification plan, it's lucrative for plan servicers. You'd think they would step up. They say they are, but we need to see it," Zandi said.

Zandi said one reason we're not seeing even more loan modifications is that servicers are "overwhelmed and don't want to invest." The administration hoped that servers would beef up their staff and do more, "but it feels like they're overwhelmed," he said. "It's another reason to be concerned."