Though home prices continued to fall in July, there are growing signs that — in some regions at least — the market may be stabilizing as lower prices lure some buyers off the sidelines. But a broad housing recovery faces stiff headwinds in the form of rising unemployment, tighter credit for borrowers and a huge inventory of unsold homes.
The widely watched Standard & Poor's/Case-Shiller national home price index fell by a record 15.4 percent during the second quarter compared to the same period a year ago.
Still, the report offered a glimmer of hope that the slide in home prices may be easing: The rate of price drops slowed from May to June, and regional price data showed that nine of the 20 cities tracked by the index posted slight month-to-month gains.
"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”
Other housing news this week also gave reason for cautious optimism. Sales of new homes posted an unexpected gain of 2.4 percent in July, and sales of existing homes rose 3.1 percent, more than expected.
But in both cases, the reports were mixed. Median prices for existing homes are still falling, and the number of unsold homes on the market hit an all-time high.
“The question is 'Where is the economy going?'” said Robert Brusca, chief economist at Fact and Opinion Economics. “If the economy gets weaker, this stability we see in housing will give way and we’ll get traditionally weakness in housing that will come from the economy itself. So we have to be concerned about that."
Even the usually optimistic White House was extremely cautious in its reaction.
"The data today paint a mixed picture, but it's clear it will still take some time to work through the downturn in housing," White House spokesman Tony Fratto said in Crawford, Texas, where President Bush was spending time at his ranch. "Once housing prices stabilize that will signal a return to a housing industry that can contribute to economic growth."
Like discounted merchandise in a department store, lower home prices should eventually spur sales. Buyers who were priced out of the market during the peak of the housing boom have a better shot at homeownership as prices fall.
The national “affordability index” — which tracks incomes, mortgage rates and home prices —fell a bit in July, meaning houses became a bit less affordable, mainly due to rising mortgage rates. But overall, homes are generally more affordable than they were at the height of the boom.
The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.
The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.
“I anticipate seeing price support probably sometime in the first or second quarter of next year when the foreclosure market stabilizes back to more normal numbers,” Damian Kassab, CEO of Warren Bank in Clinton, Mich., said on CNBC.
Foreclosure filings continued to rise in July — up 8 percent from June and 55 percent higher than last July. Last month, the White House signed housing legislation designed to head off foreclosures by allowing an estimated 400,000 homeowners swap their mortgages for more affordable loans.
But homeowners can only participate if their lender agrees to take a loss on the loan. Even if the plan works as intended, some 2.8 million U.S. households will either face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, according to estimates by Moody's Economy.com.
Signs of a bottom in the housing market are further clouded by the recent rise in the unemployment rate. Homeowners who might have otherwise managed to keep up with their mortgage payments will have a harder time doing so if they’re out of a job.
Consumer budgets are also being squeezed by higher food and energy prices, though household budgets have recently gotten something of a reprieve as gasoline prices have eased. That helped lift overall consumer confidence a bit in July, though the outlook for jobs turned bleaker, according to the latest monthly survey from The Conference Board.
“We are not out of this," said Ken Goldstein, an economist at the Conference Board. “We still have months to go before the economy and the housing market will be improving. That's not going to happen until 2009, maybe not until the summer of 2009.”