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April 11, 2012, 12:02 a.m. EDT

A slowly healing housing market

Spring housing data is encouraging, but this will be a slow recovery

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By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) — Encouraging reports on the housing market are stirring up optimism about this year’s home buying and selling season.

But industry watchers say not to get too excited: Even if 2012 brings increased sales and stabilized home prices, they expect for improvement to come slowly, due to a continued subdued demand for housing.

“Expect the market to improve in the spring, but in baby steps,” said Sam Khater, senior economist for CoreLogic, a provider of consumer, financial and property information. “It’s still getting off the crutches and learning to walk again and that process is going to take a good two to three years before the market is on firm footing.”

Spring thaw?
Encouraging reports on the housing market are stirring up optimism about this year’s home buying and selling season.
Video: Fighting Irish defend real estate market

Competition starts to grow
The housing market still favors the buyer, but signs point to it slowly emerging from the doldrums. In many areas, buyers can no longer count on rock-bottom deals.

Upgrades we want most
When homeowners plan for their next house, or plan the remodeling projects that they want to undertake on their current home, there are seven priority spaces that they are focusing on.
See the full report on spring real estate
/conga/story/2012/04/spring_real_estate.html 202359

There’s a bit more buyer confidence in the market this year, but that doesn’t necessarily translate to a huge increase in sales, said Mike Larson, an analyst with Weiss Research. “If anything, we’re going to be disappointed in the pace of improvement,” he said.

Still, numbers like these are bound to inspire hope for the industry: The pace of existing-home sales was at its highest January and February levels in five years, according to the National Association of Realtors. Sales of new homes were up 11.4% in February, compared with the year before, according to the Commerce Department. True, home prices are still falling, according to the S&P/Case-Shiller home-price index, but prices typically lag behind improvement in home sales, economists say.

Read more: Home sales dip, but best February in five years.

Read more: Sales of new homes dip 1.6%, while prices jump.

Plus, a recent survey from Fannie Mae found that an increasing share of Americans expect mortgage rates and home prices to rise in the next year. With rental prices also creeping up, some might feel that homeownership is becoming a more compelling choice, said Doug Duncan, vice president and chief economist of Fannie Mae, in a news release.

“The nation is in a better mood about housing this year than we were last year,” said Charlie Young, chief executive of ERA Real Estate, a residential real-estate brokerage franchiser. “There is a good, positive feeling about the spring selling season, and you’re seeing that in activity, home buyers getting into the marketplace, more activity around open houses… and an increase in listing inventory.”

Market by market

Despite this better mood about housing, markets are improving at their own paces, and conditions vary widely.

Between March 2012 and March 2013, prices are expected to drop by an average 0.85% on a nationwide basis, according to the forecast from Veros Real Estate Solutions, a risk management and valuation services firm. Most markets that are strengthening have a job market that is stabilizing and housing inventory that is shrinking, said Eric Fox, vice president of statistical and economic modeling at the firm.

Some markets where prices took a beating during the housing bust are starting to come back to life, including Phoenix, where prices are expected to appreciate by 5% over the next twelve months, he said.

“It almost caught us by surprise. You look at the fundamentals in Phoenix, the housing supply is down by about two-thirds, prices are down quite significantly, affordability is quite fantastic and there’s high demand as well because there’s investment activity going on,” Fox said. An improving employment market there is adding fuel to the fire, he added.

For other hard-hit markets it isn’t as pretty. Seven out of the 10 worst markets are in interior areas of California and Nevada, including Bakersfield, Modesto, Fresno, Stockton and Reno, according to Veros. In Bakersfield, prices are expected to fall 6.3% in the year ahead.

“It will be some time before we can say overall, in the U.S., the real-estate market looks good, like we might have said in 2005. In 2008, we said everything looks bad no matter where you were,” Fox said. “Now it’s a hodgepodge, and I think it will be that way for some time.”

Waiting on demand

One large roadblock to a complete housing recovery is weak demand. There are several reasons why demand hasn’t returned in full force.

A big reason: Many people can’t afford a home, at a time when down payments are necessary and mortgage underwriting standards are high.

While the employment picture is looking somewhat brighter on a national basis, the numbers don’t account for the people who have jobs but are making less than what they had been, Khater points out. “The issue is not just getting over the housing depression and economic recession. It’s also overcoming the stagnation of incomes that dates back to the 1990s.”

Another factor stunting demand for homes is the fact that many homeowners are underwater on their mortgages, owing more on their mortgage than what their home is currently worth. Some of these people who want to move simply can’t afford to at this time, Young said. And even if they can, in some markets, there isn’t enough well priced, move-in condition inventory to get move-up buyers back into the market, he added.

While there is increased confidence in the housing market these days, many would-be buyers see little urgency to take advantage of current home affordability, which also works to slow down the pace of sales, Larson said. With mortgage rates low and housing prices still falling — albeit not as steeply — some buyers continue to wait, he added.

Finally, there’s also the fear factor that many would-be buyers can’t seem to shake, Larson said. They’ve seen how homeowners have been affected by the housing bust, and they’re not willing to take any chances.

“You talk to people who arguably have the motive and means to buy a home and they’re not in any rush,” he said. “People are gun shy. As long as that is the case, it’s going to be a market that takes a long time to heal.”

Amy Hoak is a MarketWatch reporter based in Chicago.

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Amy Hoak covers real estate and personal finance for MarketWatch, and writes the Home Economics column. She also writes MarketWatch's Real Estate Weekly...

Amy Hoak covers real estate and personal finance for MarketWatch, and writes the Home Economics column. She also writes MarketWatch's Real Estate Weekly newsletter and is a contributor to The Wall Street Journal Sunday. She has won awards for her work from the National Association of Real Estate Editors and the Society of American Business Editors and Writers.

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