After welcome signs of growth in housing earlier this year, home sales — and prices — are likely to wilt again in the summer heat, a victim of rising foreclosures and weak demand in many parts of the U.S.
Like the economic recovery in general, the housing recovery is uneven: Data for the nation as a whole show prices inching higher, but in many parts of the country prices have yet to hit bottom, analysts say. And when prices do recover, the gains will be gradual.
“In some of these markets that were hit, say, 50 percent or so, it’s going to take years to recoup that lost real estate wealth,” said Andrew Gledhill, an economist with Moody’s Analytics. “I don’t think this is a one- or two-year problem. This is a five-or six-year problem.”
After steep declines following the housing bust, prices on the national level appear to be leveling off. The median price for an existing home sold in June was $183,700 — up 1 percent from a year ago, according to the National Association of Realtors.
But that figure masks wide variations in prices from one metro area to the next. Home prices were still falling in most metro areas in the first quarter, the latest local data available from the Federal Housing Finance Agency and included in the latest Adversity Index from Moody's and msnbc.com. Prices had hit bottom in just 71 of the 384 metro areas covered by the data.
Prices in Merced, Calif., the hardest hit metro, have fallen 62 percent since they peaked in the first quarter of 2006, according to the FHFA. Home prices in metro markets in Florida, Arizona and Nevada have taken big hits, too. Of the 25 metro areas with the biggest price declines, 12 are in California, nine are in Florida, and one each in Nevada and Arizona.
Some of those hard-hit markets may have hit bottom. Prices have begin rising modestly in Merced and Fresno, Calif., and in Florida markets like Naples, Punta Gorda, Fort Lauderdale and Melbourne.
Conversely, much of the Midwest and other areas that avoided the housing bubble have seen only mild price declines or gradual recovery. Roughly half of all metro areas in the country have suffered home price drops of 10 percent or less.
Those regions largely avoided the run-up because homes were relatively affordable and didn’t require buyers to take on outsized mortgages. They were also less prone to the invasion of home-flipping investors who descended on the hottest markets in California, Florida, Nevada and Arizona during the boom .
The housing market got a boost in the spring, buoyed by a government tax credit and persistently low interest rates. Home buyers in many parts of the country also were encouraged by signs that the economy appeared to getting back on track. Sales of existing homes posted solid gains in the first quarter and rose 8 percent in April, the last month the tax credit was available.
Since then, home sales have stalled, dropping 5 percent in June. Sales of new homes remain mired at near-record lows.
"After the first tax credit, sales shot up, and then they just collapsed in November," said Patrick Newport, a senior economist with IHS Global Insight. "The same thing happened with this one. Sales shot up, and now they’re going to collapse again. The only question is how deep the drop will be."
Low mortgage rates haven’t been enough to entice jittery home buyers worried about losing their job. Recent volatility in the stock market hasn’t helped either.
“The net of the last few months has been, ‘Yeah, you've had a big drop in mortgage rates,” said Jim O’Sullivan, chief economist at MF Global Advisors. “But consumer confidence has taken a hit from all this turmoil in the markets.”
After slow improvement in the economy in the first half of the year, forecasters have begun paring back their expectations for the second half. As of May, the latest data available, five more states had moved out of recession into recovery, according to the Adversity Index. That put three-fourths of the states in recovery; in the remaining 12 states, the recession was moderating. None remained in full-blown recession.
On a local level, the economy was expanding in two of the 384 metropolitan areas tracked by the index. Of the remainder, 290 were in recovery and 92 were experiencing a moderating recession. None was in full recession as of May.
But more recent econmonic data point to signs of renewed weakness in the economy. After a strong start in the first quarter, job gains have slowed. As long as the job market remains weak, the housing market will have a tough time getting back on its feet.
That's because with jobs so scarce, people are unable to form their own households and have been moving back in with parents, relatives or doubling up. Last year, the pace of new U.S. household formation fell to the second lowest level since 1947.
Gledhill and other market watchers expect prices to drop by another 5 percent nationally before recovering next year and gradually trending higher over the next few years.
“We don’t have the housing market getting back on track until 2013,” said Newport. “If you consider that housing market began to collapse in late 2005, that's nearly eight years.”
That forecast is based in part on the large number of foreclosed homes that have yet to be listed on the market. This so-called “shadow” inventory is expected to weigh heavily on prices. That means the biggest price drops may be felt in areas that have already sustained the heaviest damage.
“The places that have already fallen so much are at more risk of price declines because of the effect of home foreclosures,” said Gledhill. “Especially Florida and Nevada, mortgage credit conditions are really pretty poor. So we still think we’re going to see more foreclosures — even with the government’s effort to modify loans and stem this problem.”
So far, that government effort has produced relatively few permanent loan modifications; in many cases, foreclosures have been delayed but not avoided.
As a result, some three years after the housing bust, the foreclosure rate continues to rise in three out of four metro areas, according to the latest data from RealtyTrac, which collects foreclosure date for the 206 biggest metro areas.
Foreclosure rates are highest in the same states that saw the biggest price declines: California, Florida, Nevada and Arizona.
Sales of these "distressed" properties have put pressure on homebuilders to cut prices. Though new home sales bumped up in June from the lowest levels on record, those sales came at a cost, said David Goldberg, a housing industry analyst at UBS.
“We definitely saw some more incentives and price declines in June,” he said. “You might be able to keep the sales pace up a bit from that all-time low level. But if you’re offering a lot of incentives to do it, your profit margins are coming down.”