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Housing Market Teeters Between Recovery, Relapse

By Dina ElBoghdady and Renae Merle
Washington Post Staff Writers
Thursday, July 30, 2009

The battered housing market appears to be on the mend, with sales climbing nationally and prices leveling off, even rising in some spots.

But swelling unemployment and the related delinquencies and foreclosures threaten to upend these gains, industry experts said.

"That's a huge cloud hanging over the housing market," said Guy Cecala, publisher of Inside Mortgage Finance. "We can no longer blame the problems on bad mortgage products. It's now about people losing their jobs, and that's an even tougher problem for the government to address."

For now, the pickup in home sales is largely driven by buyers rushing to take advantage of near-record-low interest rates, a recently enacted temporary tax credit for first-time home buyers and the rock-bottom prices in areas hit hard by foreclosures. As buyers snap up deals, the excess supply of homes is shrinking, which is helping stabilize prices.

On Tuesday, the Standard & Poor's/Case-Shiller price index, a closely watched gauge, showed that single-family-home prices rose 0.5 percent from April to May, the first monthly increase since 2006. Earlier this week, the federal government reported an 11 percent rise in new-home sales from May to June, the largest monthly gain in nine years. Sales of previously owned homes jumped for the third straight month, up 3.6 percent in June, the National Association of Realtors said.

The national trend jibes with Washington area statistics also released this week. A study by Delta Associates found that more area homes were sold in the second quarter than a year earlier, and that on average they sold more quickly. The sales volume increased 7 percent during that period, while prices jumped in almost every local jurisdiction. The S&P/Case-Shiller index reported that area prices were up 1.3 percent in June from the previous month.

Whether these trends can be sustained depends on how large a share of future home sales are the result of foreclosures and other distressed sales, said Mark Zandi, chief economist at Moody's Economy.com.

Foreclosures tend to drag down prices. But the share of foreclosures in total sales shrank in the spring and summer months, when home-buying activity is at its busiest, as more traditional sellers put their homes on the market.

Foreclosures also abated during that period because, under government pressure, many lenders had temporarily halted foreclosure sales, further boosting prices. These lenders were waiting to learn more about new loan-modification programs aimed at helping distressed borrowers, including an effort by the Obama administration to help them by lowering their mortgage payments.

In June, 31 percent of transactions were distressed sales, compared with about 50 percent in the early months of this year, according to a survey of real estate agents by the National Association of Realtors. Foreclosure sales fell to about 239,000 in the second quarter from their peak of 263,000 in the middle of last year, according to data released Wednesday by Hope Now, an industry alliance.

But now, the foreclosure moratoriums adopted by lenders have expired and foreclosure rates are expected to rise again through the rest of the year. Job losses are likely to exacerbate the problem.

"In all likelihood, the house price declines are not over," Zandi said. "They are going to re-intensify this winter. The distressed sales will pick up. "

In Maryland, for example, auctions of foreclosed properties dipped last year after the state lengthened the foreclosure process to give borrowers more time to try to save their homes. But, according to data compiled by RealtyTrac, those auctions have started to rise again.

Lawrence Yun, chief economist for the Realtors group, said rising joblessness assures that the number of foreclosures this year will be higher than it was last year, but that does not mean that prices will necessarily sink. "The prices will only go down if the foreclosures linger on the market," he said. "But I think buyers are feeling more confident, and the foreclosures won't linger."

For its part, the Federal Housing Administration is trying to lessen the blow. On Thursday, the agency plans to unveil a program designed to make it easier for borrowers to rework their loans and lower their monthly payments. The program, which would go into effect Aug. 15, will be modeled after the administration's Making Home Affordable plan but differ in some respects.

Many industry analysts are skeptical that the Obama administration's initiatives will make a significant dent in the foreclosure crisis. They do agree, however, that the housing market is closer to hitting bottom than it was at this time last year.

Mike Larson, a Weiss Research analyst, said that when the market does recover, "I don't expect a big rebound like the past housing recoveries, where construction activity and sales come roaring back. . . . It's going to be a slow, gradual normalization of the housing market after a period of housing Armageddon."

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