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Experts see underlying weakness in housing

Home sale signs are visible on a street corner in Portland, Ore. A spring sales fling could turn into a summer hangover for real estate.Don Ryan / AP
/ Source: contributor

The housing market had a spring fling with buyers hoping to find bargains using the now-expired government tax credits and record low interest rates.

Now it's back to reality.

The sweet sales pace of March and April, many experts agree, will sour by mid-summer, and the national housing downturn has not yet ebbed.

“Anyone expecting a robust rebound in the housing market ... will be sorely disappointed,” said Stan Humphries, chief economist for the online real estate database

Although sales of existing homes and new homes rose for two straight months in March and April, values are still weakening, according to the widely watched Standard & Poor's/Case-Shiller index reported Tuesday.

Case-Shiller’s composite of 20 U.S. cities found a “renewed weakness” in housing prices amid climbing foreclosure rates and the end of the tax incentives.

“The correction is definitely not over,” said Benjamin D. Clark, a Salt Lake City broker and president of the National Association of Exclusive Buyer Agents.

Spring sales have been boosted by historically low interest rates and a federal tax incentive that was worth up to $8,000 for home buyers who signed purchase agreements by April 30.

Sales of existing homes rose 7.6 percent in April on top of a 7 percent increase in March, according to the National Association of Realtors, which touted “a return of buyer confidence with stabilizing home prices.”

The Commerce Department said Wednesday that sales of new single-family homes jumped 14.8 percent to a seasonally adjusted annual rate of 504,000 units. That was after a 29.8 percent surge in March, the biggest monthly increase in 47 years.

But Clark said many agents believe the federal tax credit “merely postponed, delayed, or softened a meaningful and inevitable correction.”

“I don't know if low interest rates alone will keep existing home sales on the upswing,” he said.

Under the federal incentive, first-time home buyers got an $8,000 tax credit and repeat home buyers got a $6,500 credit for home purchases in which binding sales contracts were signed by April 30. (Qualified buyers have until June 30 to complete their purchases.)

Clark said some agents believe the looming expiration of the tax credit merely pulled some business forward.

Indeed, a recent report by the Mortgage Bankers Association indicated that cheap loan rates — tamped even lower by concerns over Europe’s economy — have not filled the void left by the tax incentives. Mortgage applications for home purchases fell 27 percent in the week ended May 14 to the lowest level since May 1997.

Still, the happy vapors of the tax incentives will, on paper, continue to inflate home-sale stats nationally for the next five weeks, analysts said. That’s because many of the homes that went under contract in April had closings scheduled for May and June.

“We’re expecting a barn-buster June in our closings,” said Ted C. Jones, senior vice president and chief economist at the Houston-based Stewart Title Guaranty Company. “In fact, we had an internal memo go out saying no one can take vacations in June.”

And after that?

“Expect a payback in July and August,” said Zillow economist Humphries, “A lot of current demand in the marketplace has been stolen from those months.”

In mid-to-late summer – typically monster months for the housing market – many experts foresee a sharp slump in home sales. And above that expected dip still another dark cloud hovers.

In April, as tax credits goosed sales, twice as many homes were added to the market as were sold, Humphries said. Consequently, while the spring sales frenzy had realtors bustling and beaming, the glut of housing inventory actually swelled. The number of vacant American homes reached 19 million during the first quarter of 2010, according to the U.S. Commerce Department.

“We’re now seeing pent-up supply. That will keep prices down,” Jones said. “That’s why I don’t anticipate a price recovery (nationally) for 18 to 24 months.”

Jones, however, remains optimistic, in part because he believes “there’s no such thing as a national real estate market.”

He pointed to surging sales in California and Florida, two states that have been especially hard hit by the housing bust.

“I’m not telling you prices are going up,” he added, “I’m telling you people are realizing what a great time it is to buy.”

Though Jones agreed that the tax credits probably boosted sales by about 10 percent, he’s not alone in seeing sunnier days approaching. Joel Naroff, head of Philadelphia-based Naroff Economic Advisors, predicted the second half of 2010 will bring a slow and steady improvement to the housing market. Still, he added, in a written comment, “It will take a while before the craziness created by the federal policy is washed out of the data.”

While the housing correction continues, it is nonetheless “entering a new phase,” said  Zillow’s Humphries.

“The period of sustained, dramatic declines in home values is over in most markets,” Humphries said. “We’re entering, now, a period of negligible price appreciation which will last for the next three to five years.”

Of course, the alternative to that “long long, flat bottom,” he added, is more price drops.

“So, in view of that, it’s not as bad as it could be.”