Lower prices have spurred home sales, but looming foreclosures and high unemployment are clouding the outlook

The U.S. housing market has been in a slump for the past four years. When will it ever end?

In recent years, real estate has proven as jittery and unreliable as any other market. The average U.S. home price nearly doubled between January 2000 and April 2006, according to the First American LoanPerformance index. Since then, the average has fallen about 30%. The drop has been 53% in the Las Vegas metropolitan area and 39% in Miami, where about a quarter of all households with mortgages are behind on their payments or in foreclosure. The value of your home might be determined more by whether the neighbors keep their jobs than whether the house has ample light and closet space.

Here is a guide to navigating a fractured and volatile market:

1. Is the housing market getting better?
It has shown some signs of healing this year, but the much-touted recovery is tentative and fragile.

Home sales have increased from the severely depressed levels of 2008. The inventory of unsold homes listed for sale also is down. Bidding wars are breaking out for foreclosed homes in the sorts of neighborhoods (near jobs and decent schools) that attract both first-time buyers and investors seeking rental properties.

But more than 6.7 million U.S. households with mortgages, or about 13%, are behind on their payments or are in the foreclosure process, according to the Mortgage Bankers Association. Eventually, many of them will lose those homes, sending more supply onto the market. Unemployment has continued to rise, and the housing market is unlikely to show a sustained recovery until job growth resumes.

While the supply of middle-class homes on the market has declined somewhat, it remains ample in most places. And there is a huge glut of high-end houses for sale in many areas. That means prices of high-end homes might still have a long way to fall.

2. When will housing bottom out?
There probably won’t be any clear turning point. Monthly indicators, such as home sales and prices, tend to bounce erratically from month to month, making it hard to discern the underlying trend. And the housing bust will end at different times in different places. House prices already might have bottomed out in the coveted Virginia suburbs with short commutes into Washington, D.C., for instance. But it probably will be years before all of the unsold condos find buyers in parts of Florida.

Generalizations about states or metropolitan areas don’t say much about what is happening in your neighborhood. In Summit, N.J., known for good schools and an easy, 45-minute train commute to Manhattan, the median home price in September was up 1.2% from a year earlier, according to Otteau Valuation Group, an appraisal company. In Atlantic City, N.J., which suffers from too much speculative building of condominiums and weak demand for vacation homes, the median price is down about 12% from a year ago.

3. What signals should I watch to determine whether my local market is improving?
One way to get a sense of supply is to ask a good local real estate agent for stats on how many homes are listed for sale in your town and how many months it would take at the current sales rate to absorb that supply. Anything over about six months generally is considered high, meaning that sellers might have to cut prices. Another way to get a sense of a neighborhood’s health is to count the number of for-sale signs and vacant houses. If there are more than a couple vacant homes in a block, that might be a bad sign, particularly if no one is taking care of them.

The supply of homes listed for sale has fallen very sharply in some areas. But the supply is likely to balloon again in many areas with a renewed surge in foreclosures. Many local newspapers provide information on foreclosure filings.

Demand depends heavily on the job market. The U.S. Bureau of Labor Statistics provides unemployment rates by metropolitan area. In September, they ranged from 2.9% in Bismarck, N.D., to 30% in El Centro, Calif. State and local agencies provide job-market data, too. Celia Chen, a housing economist at Moody’s Economy.com, says help-wanted signs can be a useful local indicator; if you start seeing more of them around your neighborhood, that is a sign that business in your area could be starting to recover.

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Many things may be said about the last decade in the real estate market – that it began with falling prices and ended with rising ones, that after a serious slump in the early years a bubble might be forming in the later ones. It’s all true. But overall, it can be summed up as a lost decade.

At the end of the decade’s last year we passed the price threshold of 10 years ago, when the high-tech bubble was at its height. In many places – Haifa, Be’er Sheva and the country’s outlying areas – prices at the end of the decade did not even reach those at the end of the 1990s.

Overall, the real estate market made a lot of noise this decade, but prices did not go up by much. In other words, if you bought an apartment in 1999 in the hope that the skyrocketing trend would continue into the new millennium, you lost.

To illustrate this, we need to begin in 1998. That was the year the real estate market began to be boosted by the high-tech bubble and apartment prices anywhere associated with this sector, particularly in Tel Aviv’s new north, Ra’anana and Haifa, went up significantly. According to the Central Bureau of Statistics, Tel Aviv apartment prices in 1998 and 1999 (in real terms) went up 20%; in Haifa they went up 16% and in Jerusalem 15%. For the whole country on average, prices increased only 5% because the high-tech frenzy only gripped a few areas.

That’s the context for the past 10 years, which opened with a sharp slide in prices, especially in the areas high-tech people like best. These areas had seen sharp rises at the end of the previous decade. Between 1999, at the height of the high-tech bubble, and 2001, prices dropped in Tel Aviv and Haifa by about 20% and in Jerusalem by about 15%. For the country as a whole, this fall was about 10%.

The second intifada at the beginning of the decade played its part in dampening the national mood. The number of purchases dropped from around 90,000 a year in the 1990s to only 64,000 in 2002 – the decade’s worst year in terms of housing purchases. In 2003 the number of transactions rose to 75,000 and in 2004 to 79,000, but prices stayed low. The number of transactions then rose steadily, topping 97,000 in 2007. It then shrank to 91,500 in 2009.

Orthodox to Jerusalem, others to the coast
Another key trend began at around the middle of the decade – purchases by foreigners. The real estate bubble in the West made its mark, along with a rise in anti-Semitism in some countries, leading to a significant number of housing purchases by Jews from abroad.

Most of them did not buy in order to immigrate, but to have a second home. Religious foreigners bought apartments mainly in Jerusalem and Ra’anana. Others preferred homes with a view of the sea in Herzliya Pituah, Netanya or Tel Aviv. The Ashdod marina projects also mushroomed, and foreigners did not avoid Eilat’s Shahamon neighborhood.

According to the Finance Ministry’s State Revenue Administration, foreigners bought 1,427 homes in 2002. This jumped to 2,305 in 2006 and peaked in 2006: Out of 87,000 transactions, 5,054, almost 6%, were by foreigners.

This may seem to be a small slice of the market. However, foreigners made their purchases in a limited number of communities, mainly upscale ones. This meant they were buying many apartments in Tel Aviv’s prestigious towers and fine homes in Jerusalem’s Rehavia and Greek Colony neighborhoods.

The influx of foreigners drove prices up. This phenomenon began in 2004 in Tel Aviv and Jerusalem and trickled down to the whole market the next year. The capital market gave prices another hefty push upwards, and the general public was buying apartments, too.

Prices rose in most of the country, though this took a while longer in outlying areas, particularly in the north, which was under missile attack during the Second Lebanon War in 2006.

After the world economic crisis broke in 2008, apartment purchases by foreigners slowed considerably. In 2008, foreigners bought 3,238 homes, a number that dwindled in 2009.

In fact, the role of foreigners in jump-starting the housing market ended three years ago. Now, locals are mainly responsible for rising prices, especially over the past year. Real estate has become a significant investment – it is estimated that some 28,000 of the transactions closed this year were by people who had found no better place to put their money.

There are yet more signs that the crippled U.S. housing sector is getting back on its feet. On Nov. 23 news arrived that U.S. existing home sales jumped 10.1% in October. Homes were bought and sold at the rate of 6.1 million per year???much better than the 4.5 million rate in the beginning of the year. More data are expected in coming days on home prices and new-home sales.

“We’ve seen some more encouraging data [on] the housing picture, but we’re not out of the woods,” says Michael Sheldon, chief market strategist at RDM Financial Group. The challenges remaining for residential real estate include the many foreclosed homes moving onto the market, a large inventory of unsold homes, questions surrounding the federal government’s efforts to stimulate housing sales, and broader economic weakness that saps Americans’ ability to buy.

So what signals could demonstrate that the housing market has real strength? BusinessWeek asked economists and housing experts which indicators they’re watching closely.

Housing Inventory
As with any market, the balance of supply and demand matters in real estate. And that balance is still out of whack, but it is improving. In October the equivalent of seven months’ supply of existing homes were on the market, down from eight months in September.

“We’re showing signs that we’re clearing out the excess inventory,” says Michael Strauss, chief economist at the Commonfund, but inventories are still high. A more normal level would be 5.5 to 6 months, he says.

One good sign is that homebuilders seem to be adding very little supply, with new-home inventories at their lowest levels since 1982. “All the unsold stuff is starting to get liquidated,” says Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN). “But there is still so much that has to be sold before the market has a semblance of normality.”

Home Prices

Home prices remain depressed but may have hit bottom. The median sale price of an existing home in October was down 7.1% from a year ago, better than the 8% year-over-year decline in September.

When the weather gets warmer in spring, home buyers come out of hibernation and housing prices often move higher. The spring of 2010 may be the market’s best hope for a significant upswing in home values???the first in more than three years, says Michael Englund, chief economist at Action Economics.

“If the story is out that we’re seeing big increases in price, that will be an encouraging sign,” Englund says. That, in turn, could give a big boost to the psychology of the housing market and to the mindset of Americans who have so much of their wealth tied up in their homes. “We need the housing market to stabilize because it is such an important component of household wealth,” says Jerry Webman, chief economist at OppenheimerFunds.

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The housing market may be busier, but that doesn’t mean home values are set to rebound any time soon

If you’re selling your home, the good news is that you’re likelier to find a buyer now than in the last couple of years.

The bad news is you should be prepared to slash your asking price.

This summer, recent data show, real estate agents are busy and, spurred by low interest rates, falling home prices, a wide selection, and government incentives for first-time home buyers, home shoppers are becoming home buyers.

“What we’re seeing is a turn in the housing market,” says Gary Wolfer, chief economist with Univest Wealth Management (UVSP).

What we’re not seeing, however, is rising home prices. And that’s disturbing to the many Americans who have a large share of their wealth tied up in real estate.

Supply of Homes Rising Alongside Sales
Even as existing-home sales rose 7.2% in July, the total supply of existing homes on the market rose 7.3%, to more than 4 million. According to National Association of Realtors data, released Aug. 21, if home sales continue at this pace, it would take 9.4 months to sell off the supply.

The rise in supply is more than quenching the rising demand. The median existing-home price in July was $178,400, 15.1% below a year ago.

A better gauge of home prices arrives on Aug. 28, when the June S&P/Case-Shiller Home Price index is scheduled to be released. The May index, released a month ago, showed prices were down 17.1% from a year ago, but up 0.5% from April. Action Economics expects June’s index to dip slightly lower again.

Even if prices improve modestly, it may be difficult to stop the slide of home prices entirely for several more months, economists say.

“Clearly the downward pressure on home prices should ease as we go forward,” says First American Funds chief economist Keith Hembre. “But there is still going to be downward pressure.”

One problem is foreclosures and other forced sales of homes. The National Association of Realtors estimates 31% of sales were “distressed transactions” in July.

These sales add supply to an already crowded housing market, but also have a broader impact. Just a couple of foreclosure sales can hurt prices across an entire neighborhood, notes OppenheimerFunds (OPY) economist Brian Levitt.

Weak Job Market Threatens Recovery
Other trends are working against the housing market. Last month, U.S. nonfarm payrolls fell another 247,000, less than expected, and the unemployment rate fell from 9.5% to 9.4%. Job losses may be slowing, but layoffs haven’t stopped. For the week ended Aug. 15, initial jobless claims rose by 15,000 to 576,000.

These labor market statistics affect both supply and demand in the housing market.

The unemployed are at risk of losing their homes. “Today’s jobless claim could be tomorrow’s delinquency or foreclosure,” Levitt says.

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Home Depot (HD) offered some encouragement to bullish investors on June 10 when the retailer raised its earnings estimates for the year. The home improvement giant also unveiled a variety of ways executives are trying to improve and cut costs in areas ranging from its supply chain to information technology and employee training.

But despite these efforts, Home Depot again demonstrated how closely its fate is tied to that of the broader economy, and especially to the housing market.

The good news: Executives were confident enough to increase their 2009 profit prediction. Rather than an earlier estimated drop of 7% in earnings per share, they say profits for 2009 could be flat or down as much as 7&. The company still expects 2009 sales to fall about 9%.

The news could be interpreted as a sign that the chain, along with many other retailers, is finding ways to widen profit margins during the recession even as sales fall. “Home Depot is making the right moves to restructure themselves for a better environment,” says Morgan Stanley (MS) analyst Gregory Melich.
” a very good may”

The near-term outlook for sales is improving, too, executives say. Chief Financial Officer Carol Tome told analysts that “economic signals remain mixed,” but added, “we had a very good May. May was better than the first quarter and it was better than April. Now it’s June, and June is continuing to be very good relative to our plans.”

She warned, however, that recent strength was driven by seasonal sales that could end by early July, prompting the company to remain cautious. “Our sense is a decent sales performance in May provided management with some comfort going ahead with the improved guidance,” Robert W. Baird analyst Peter S. Benedict said.

Improvement in the economic environment is crucial for a retailer like Home Depot. Economists and many consumers have become more optimistic about the prospects for the economy later this year and in 2010. The stock market, represented by the Standard & Poor’s 500-stock index, is up more than 30% in three months.
fears of rising mortgage rates

But there are signs of danger. Gas prices are on the rise, eating up more of Americans’ stagnant incomes. The price of a barrel of crude oil, above $71 on June 10, is nearly double the price in January. The May jobs report, issued on June 5, showed wage growth slowing to a crawl, with average hourly earnings up 0.1%.

“The ongoing concern is that consumer spending is weakening anew, which could ultimately lead to a double-dip in activity for the economy as a whole,” Deutsche Bank (DB) economist Joseph LaVorgna warned on June 9.

Home Depot’s fortunes closely track those of the depressed housing market. America’s housing bust is largely responsible for the home improvement chain facing its third consecutive year of declining earnings and sales. “The macro environment will remain the key driver of this stock in the near term,” says Credit Suisse (CS) analyst Gary Balter. Of particular concern are rising mortgage rates, which make home buying more expensive. “Rising rates could quickly extinguish hopes for a steady recovery into next year,” Balter wrote.

Home Depot’s Tome says the company is closely watching foreclosure rates across the country. (Although at least one analyst, Stephen Chick of FBR Capital Markets (FBR), believes foreclosures could actually spur sales at Home Depot, “as many of these foreclosed homes require renovations and updated maintenance.”)
residential spending may have bottomed

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If you’re selling your home, the good news is that you’re likelier to find a buyer now than in the last couple of years.

The bad news is you should be prepared to slash your asking price.

This summer, recent data show, real estate agents are busy and, spurred by low interest rates, falling home prices, a wide selection, and government incentives for first-time home buyers, home shoppers are becoming home buyers.

“What we’re seeing is a turn in the housing market,” says Gary Wolfer, chief economist with Univest Wealth Management (UVSP).

What we’re not seeing, however, is rising home prices. And that’s disturbing to the many Americans who have a large share of their wealth tied up in real estate.

Supply of Homes Rising Alongside Sales

Even as existing-home sales rose 7.2% in July, the total supply of existing homes on the market rose 7.3%, to more than 4 million. According to National Association of Realtors data, released Aug. 21, if home sales continue at this pace, it would take 9.4 months to sell off the supply.

The rise in supply is more than quenching the rising demand. The median existing-home price in July was $178,400, 15.1% below a year ago.

A better gauge of home prices arrives on Aug. 28, when the June S&P/Case-Shiller Home Price index is scheduled to be released. The May index, released a month ago, showed prices were down 17.1% from a year ago, but up 0.5% from April. Action Economics expects June’s index to dip slightly lower again.

Even if prices improve modestly, it may be difficult to stop the slide of home prices entirely for several more months, economists say.

“Clearly the downward pressure on home prices should ease as we go forward,” says First American Funds chief economist Keith Hembre. “But there is still going to be downward pressure.”

One problem is foreclosures and other forced sales of homes. The National Association of Realtors estimates 31% of sales were “distressed transactions” in July.

These sales add supply to an already crowded housing market, but also have a broader impact. Just a couple of foreclosure sales can hurt prices across an entire neighborhood, notes OppenheimerFunds (OPY) economist Brian Levitt.

Weak Job Market Threatens Recovery

Other trends are working against the housing market. Last month, U.S. nonfarm payrolls fell another 247,000, less than expected, and the unemployment rate fell from 9.5% to 9.4%. Job losses may be slowing, but layoffs haven’t stopped. For the week ended Aug. 15, initial jobless claims rose by 15,000 to 576,000.

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New Home Sales Rise 9.6%; Home builders Buying Lots Again; Thrifts Report First Profit Since 2007; Air Berlin May Cancel 787 Order; German Confidence Increases; Beer Prices Rise; Dollar Tree Beats Wall Street Estimates; Vonage Stock Soars

- The U.S. Commerce Department said yesterday (Wednesday) new home sales surged 9.6% to a seasonally adjusted annual rate of 433,000 in July over the previous month, demonstrating the housing market is slowly making progress. The median sales price was $210,000, down slightly from June’s $210,400 and a decline of 11.5% from year-ago levels. Since the market’s bottom in January, sales have gained 30%. Still, sales were down 13.4% from July 2008, showing the market is still not back to actual growth. Builders and real estate agents are lobbying Congress to extend an $8,000 tax credit for first-time homebuyers, which expires at the end of November. “The real estate market is really a fragile thing,” Tucson, Ariz.-based A.F. Sterling Homes Vice President Randy Agron told The Associated Press. “It’s not the right time to take [the tax credit] away.”

- After selling off billions in raw land and writing down the value of properties during the last three years, homebuilders are searching bubble markets like Sacramento, Phoenix, Las Vegas and Orlando for deals on ready-to-build lots as they prepare for a rebound. According to the S&P/Case-Shiller Home Indices, prices declined in 20 U.S. cities in June at a slower pace than forecast. The group said the home-price index declined 15.4% from a year earlier, the smallest drop since April 2008.?? The gauge rose from the prior month by the most in four years.?? “It’s a good time to acquire properties, because you can often find distressed properties at low prices,” Bernie Markstein, senior economist for the Washington-based National Association of Home Builders told Bloomberg News.

- The government’s Office of Thrift Supervision (OTS) yesterday (Wednesday) said the U.S. thrift industry booked its first profit since 2007, earning a meager $4 million in the second quarter, compared with a revised first-quarter loss of $1.62 billion. But the agency also said the number of “problem” thrifts grew to 40 from 31.?? The regulatory agencysaid the small profit, the industry’s first in two years, was from higher net interest margins, lower provisions for loan losses and higher income from fees.?? The agency, which largely oversees mortgage lenders, said the numbers reflect the nation’s weak job market and a generally weak economic environment. “Despite some encouraging signs, the industry’s performance remained uneven,” John Bowman, acting director of the OTS told Reuters,” The bottom line is the industry is not out of the woods yet.”

- Air Berlin plc may cancel its order for 25 787 Dreamliner aircraft from The Boeing Co. (BA: 51.82 +4.00 +8.36%), Aviation Week reported. The repeated delays of the aircraft are “everything but satisfactory,” Air Berlin Chief Financial Officer Ulf Huettmeyer said. “It’s no fun anymore.” The German air carrier plans to make its decision in the next few months, and will base it on aircraft’s progress, as well as its own long-distance flight strategy.

- A confidence index that measures sentiment among German business executives rose for a fifth straight month in August, increasing to 90.5 from 87.4 in July, exceeding the median forecast of 89 in a Bloomberg News survey.?? The index reached a 26-year low of 82.2 in March.?? The survey of 7,000 executives in Munich was the highest since September last year, suggesting Europe’s largest economy will gather strength after stumbling through its worst recession since World War II.?? Germany’s economy expanded by 0.3% in the second quarter as improving global trade boosted demand for exports and the government’s $122 billion (85 billion euros) package to stimulate domestic spending started to take effect. “The third quarter has all ingredients for another growth surprise,” said Carsten Brzeski, an economist at ING Group N.V. (ING: 15.08 +0.13 +0.87%) in Brussels.

- Just in time for the start of the college and pro football seasons, brewers in the United States and abroad are about to hike beer prices, pointing to sagging sales volumes and higher commodity costs.?? “We plan on taking price increases on a majority of volume and in a majority of markets this fall,” Anheuser-Busch InBev NV said. “The increase helps cover some input costs.” MillerCoors LLC also plans on raising prices as a part of its regular fall increases and are more in line with catching up with costs and commodity prices rather than the current economic environment,????? MillerCoors spokesman Julian Green told CNNMoney. Import beers sales like those from Heineken N.V. (HINKY.PK: 21.00 -0.23 -1.08%) and Grupo Modelo S.A. de C.V., the latter which distributes Corona Extra, are also feeling the crunch as consumers purchase less expensive beer. While Heineken has already raised prices, Grupo Modelo has refrained from doing so, citing the tough economy.

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