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.

4. How can I figure out the value of my home?
You never know for sure what a home will fetch until you put it on the market, and then it is partly a matter of luck. Will the eager buyer who shares your taste in home style and neighborhood show up on day one or day 200?

Some Web sites — including Zillow.com, HomeGain.com and Cyberhomes.com — provide estimates of individual home values. These estimates are largely based on recent sales of nearby homes, and in some cases they are wildly off the mark. But they often provide a ballpark idea of a home’s value.

You might come closer to the real value by talking to a local agent and looking at recent prices for homes that you know are very similar to yours. If you want to be more scientific and don’t mind paying a few hundred dollars, hire a professional appraiser.

5. Does it matter whether I’m “under water”?
At least you have plenty of company. About 20% of owners of single-family homes with mortgages owe more than the current estimated value of their homes, according to Zillow.com.

If you can afford your monthly payment and don’t need to move soon, that might not be a big problem. But it is hard, and sometimes impossible, to refinance a mortgage if you are under water, and you will take a bath if you have to sell the home now. Some people who can afford to make their monthly mortgage payments are deciding it doesn’t make sense to do so because they don’t expect their home values ever to recover to past peaks, and they could rent similar houses for much lower monthly costs.

6. If I lose my home to foreclosure, how long will it take to repair my credit record?
It probably will be three to five years before you can qualify for a home mortgage insured by the government, depending on your circumstances, and that assumes you have re-established a record for paying your bills on time. The foreclosure will remain a blot on your credit record for seven years, likely raising your interest costs even if you do get another loan. If you pay bills on time, keep your credit-card balances low and don’t apply for too many cards, you can make a “slow, gradual improvement” in your credit score, says Tom Quinn, a vice president at Fair Isaac Corp., which provides tools for analyzing credit records.

7. If I’m renting, is now a good time to buy a house?
It may well be. Prices in most areas are well below their peaks, even if they haven’t hit bottom. Don’t kid yourself that you can time the bottom of the market perfectly. But don’t feel any pressure to buy in a hurry, because the supply of housing is likely to remain ample for years in many areas.

Generally, it doesn’t make sense to buy unless you expect to remain in the house for at least four or five years, because the transaction costs — including commissions for real estate agents and mortgage fees — are heavy.

But now is clearly a good time to rent. Many landlords need tenants badly. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. So landlords are cutting rents and offering such sweeteners as free flat-screen televisions or several months of free rent to retain or attract tenants. Some owners of condos will “cut their throats to get some kind of rental income to cover part of their expenses,” says Jack McCabe, a real estate consultant in Deerfield Beach, Fla.

8. Can I get a tax credit if I buy a home now?
Under an expanded and extended program approved by Congress earlier this month, tax credits are available to many people who buy or sign a contract to buy a principal residence by April 30 and complete the purchase by June 30. The tax credit is up to $8,000 for first-time home buyers and $6,500 for people who already have owned a home for at least five consecutive years during the previous eight years. The credit is available for individual taxpayers with annual incomes of up to $145,000 or joint filers with incomes up to $245,000.

9. Can I get a mortgage on attractive terms?
Only if you have a good credit record, a moderate amount of debt in relation to your income and the ability to fully document your income. That last requirement is fairly easy for people who work for a salary and have had the same employer for more than two years, but it can be tough for self-employed people with incomes that vary substantially from year to year.

A borrower with a strong credit score of 740 or higher (on the scale of 300 to 850) and the ability to make a down payment of at least 20% could get an interest rate of about 5% with no origination fees on a 30-year fixed-rate mortgage, says Lou Barnes, a mortgage banker in Boulder, Colo. But if your credit score is 680, the rate jumps to about 5.5%.

People who can’t make a down payment of at least 20% generally are being funneled into loans insured by the Federal Housing Administration. That means paying extra fees for the FHA insurance.

Borrowing costs are steeper at the high end of the housing market. For so-called jumbo loans — those above $729,750 in areas with the highest housing costs or $417,000 in places with the lowest costs — interest rates on 30-year fixed-rate mortgages last week averaged 5.95%, according to HSH Associates, a financial publisher.

10. Should I invest in foreclosed homes?
Probably not. A lot of investors chase these properties, and only the most experienced know how to deal with all of the pitfalls. Homes auctioned at trustee or sheriff sales are sold on an as-is basis, and there is no provision for an inspection before you take ownership. If after buying you find out that termites have been treating the floor joists as an all-you-can-eat buffet, that is your problem. You must pay for the full price within a day or two, so you need a lot of cash or access to special short-term loans for investors that come with interest rates of around 18%. This is a pursuit best left to people with a lot of time, nerve, cash and knowledge of the local market.

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.

“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.

Hidden Supply

Economists and real estate experts are grasping for any indication of how much “hidden supply” is out there waiting to come to market. First, there are home buyers who would like to sell but are waiting for better market conditions. Second, there are foreclosed homes in the process of being seized and sold by banks. Both are difficult to measure or predict. “There is all this shadow inventory building up,” says Mike O’Rourke, chief market strategist at BTIG. “The banks are so overwhelmed, it takes forever to work it out.”

One positive sign: Banks already have been liquidating foreclosed homes throughout 2009, often at deep discounts. And despite the desperate deals made by these sellers, home prices have essentially moved sideways this year, Strauss notes. The median price in October was only $1,600 below its level in May.

Government Policy

Two federal policies seem to have provided a boost to the housing market this year: A tax credit provided incentives of up to $8,000 to new-home buyers, and the Federal Reserve has purchased mortgage securities in an effort to keep mortgage rates low.

The tax credit has been extended until the spring of 2010. The future of the Fed’s mortgage program is an open question. At some point both stimulus programs will need to end. The government “needs to demonstrate the economy is able to stand on its own two feet,” Sheldon says.

The good news is that the housing market probably has at least another six months to burn off inventory with government encouragement, says O’Rourke. “We want to continue to see this inventory worked off.” Once the number of unsold homes stabilizes, the market can operate more normally.

“Presumably at a certain time the housing market will have some momentum of its own,” Englund says. When stimulus is withdrawn, “the goal is to have self-sustaining increases in the housing sector.”
The Broader Economy

Problems in the housing market arguably caused the financial crisis and led to the recession. But a sustained improvement for housing might need to wait for the economy to recover on its own. The job picture, in particular, is crucial for residential real estate. “As long as people are employed, they are more likely to be current on their mortgage,” Gambera says.

Demand for housing is driven by demographics???the number of new households being created???and the jobs picture. Strauss notes that demographic trends are actually favorable. “But right now those are being more than offset by current economic conditions,” he says.

If you want to know how much your house will be worth in a year or two, you might be better off watching the labor market than the housing market. And because real estate conditions often vary greatly from region to region, the most crucial metric may be the local job picture.

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.

Homes are more affordable now, and that has brought more buyers to the market. But further improvements in affordability are dependent on prices continuing to fall, mortgage rates staying low and, especially, buyers having the income to support a major home purchase.

The brutal labor market is putting pressure on wages pressure that could persist for years, Hembre says. “You still have a pretty substantial headwind of weak employment conditions and weak income conditions,” Hembre says.

Several economists said they expect the supply of homes to finally match demand sometime in 2010. That would stop the slide of prices, but it doesn’t guarantee a rebound.

“Even after we hit the low, we’ll be bouncing along that low for an extended period of time,” says David Rosenberg, chief economist at wealth management firm Gluskin Sheff. “The bottoming-out process is [measured] in years, not quarters.”

Low End Closest to Hitting Bottom
Rosenberg believes many home buyers this summer are investors who are turning units into rental properties. As a result, rents are falling along with home prices, giving home shoppers less incentive to move from a rental unit to their own home.

According to Hembre and Rosenberg, the lower end of the housing market plagued for years by subprime and other foreclosures is closest to seeing prices hit bottom. But higher-end homes could have further to fall.

Like lower-income subprime buyers, many middle-class and upper-income homeowners also bought more home than they could afford, Rosenberg says. At the same time, demographics will hurt many baby boomers who would like to downsize to smaller homes as they age. “They’re going to be selling into a shrinking pool of trade-up buyers,” he says.

Despite the gloomy outlook for home prices, the most recent news is good. The housing market does show signs of stabilizing. The problem is that housing markets move much more slowly than stock markets, which often bounce back quickly after a sudden steep decline. While stock market players needed to wait several months for a rebound in equity prices, homeowners may be waiting several years for an improvement in the value of what is typically their biggest investment.

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

Home Depot keeps an eye on private residential spending, too, saying the data point often closely tracks its own sales trajectory. Here, Tome says residential spending, now at a 60-year-low, might have hit bottom. “Our belief [is] that the majority, if not all, of the contraction is behind us,” she said.

Baird’s Benedict agrees housing might finally be near the end of its long slide. “The lion’s share of the correction in housing and housing-related spending has occurred,” he wrote. And Citigroup (C) analyst Deborah Weinswig said in a June 10 report that “the housing market is showing early signs of recovery in markets that fell first.”

The problem is that housing’s early recovery as well as any burgeoning optimism about Home Depot could be stopped in its tracks. That’s why the company’s investors are watching the economic data carefully, wary of a negative swing in consumers’ moods or a further rise in interest rates.

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.

Homes are more affordable now, and that has brought more buyers to the market. But further improvements in affordability are dependent on prices continuing to fall, mortgage rates staying low and, especially, buyers having the income to support a major home purchase.

The brutal labor market is putting pressure on wages pressure that could persist for years, Hembre says. “You still have a pretty substantial headwind of weak employment conditions and weak income conditions,” Hembre says.

Several economists said they expect the supply of homes to finally match demand sometime in 2010. That would stop the slide of prices, but it doesn’t guarantee a rebound.

“Even after we hit the low, we’ll be bouncing along that low for an extended period of time,” says David Rosenberg, chief economist at wealth management firm Gluskin Sheff. “The bottoming-out process is [measured] in years, not quarters.”

Low End Closest to Hitting Bottom

Rosenberg believes many home buyers this summer are investors who are turning units into rental properties. As a result, rents are falling along with home prices, giving home shoppers less incentive to move from a rental unit to their own home.

According to Hembre and Rosenberg, the lower end of the housing market plagued for years by subprime and other foreclosures is closest to seeing prices hit bottom. But higher-end homes could have further to fall.

Like lower-income subprime buyers, many middle-class and upper-income homeowners also bought more home than they could afford, Rosenberg says. At the same time, demographics will hurt many baby boomers who would like to downsize to smaller homes as they age. “They’re going to be selling into a shrinking pool of trade-up buyers,” he says.

Despite the gloomy outlook for home prices, the most recent news is good. The housing market does show signs of stabilizing. The problem is that housing markets move much more slowly than stock markets, which often bounce back quickly after a sudden steep decline. While stock market players needed to wait several months for a rebound in equity prices, homeowners may be waiting several years for an improvement in the value of what is typically their biggest investment.

- 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.

- Discount retailer Dollar Tree Inc. (DLTR: 50.76 +0.63 +1.26%) saw its profit jump 50% and sales rise 12% as it soundly beat Wall Street expectations. The company reported a net income of $56.9 million, or 63 cents per share for the quarter ended Aug. 1, compared to a net income of $37.6 million, or 42 cents a share a year ago. Analysts polled by Thomson Reuters were expecting the retailer to earn 54 cents a share. Revenue rose to $1.22 billion from $1.09 billion in the same quarter last year, while same-store sales gained 6.8%. Shares of Dollar Tree hit their 52-week high of $51.39 yesterday (Wednesday), before settling at $50.13, an increase of 4.66% or $2.23.

- Shares of Vonage Holdings Corp (VG: 1.99 -0.18 -8.29%) continued to climb on Wednesday as sentiment grew that the pioneer of VOIP, or voice over Internet protocol, would survive despite earlier skepticism over its business model. After surging 35% in New York trading yesterday (Wednesday), the stock has gained more than 300% in the past week, surprising analysts who say the company still faces stiff competition and weak revenue. The stock now stands above $2 after trading at less than 50 cents a share a week ago. Vanessa Alvarez, analyst at Frost & Sullivan, said Google Inc.’s (GOOG: 466.06 -1.94 -0.41%) new voice application might be renewing interest in VOIP.?? Vonage was among the first to offer Internet-based calling services to people looking for cheaper alternatives to regular phone lines.

New sales of single-family homes came in at a seasonally adjusted annual rate of 352,000 in April, down 0.3% from a downward-revised 351,000 in March, but 34% below the April 2008 estimate of 533,000, according to the U.S. Census Bureau and the Housing and Urban Development Dept.. But new home sales are down from 362,000 in February. The median sales price of new houses sold was $209,700, down almost 15% from a year ago.

One reason for the month-to-month improvement in the housing numbers for a couple of months earlier this year was the moratorium placed on foreclosures by many banks from November through February, says Robert Stevenson, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller in New York. But since then, foreclosures have continued to rise, causing home sales to plateau.

Some of the positive data points have proved not to be sustainable, he says. “You haven’t seen as many sales as you would like coming out of the spring homebuying season and the very low mortgage rates and some of the tax stimulus,” he says. Still, homebuilders are feeling more optimistic. The National Association of Home Builders’ housing-market index, which measures both current and future sales conditions, climbed two points, to 16, in May after a five-point increase in April.

The “Better Areas” Are Going to Get Hit

Economists would like to believe the recent data indicate that the housing market has touched bottom, but prices have further to drop to reach some analysts’ peak-to-trough estimates of 43%. John Burns, a real estate consultant who advises major homebuilders, believes the median home price will fall an additional 5% or 6% and that will be the end of it. “The worst areas have been hit very hard” since that’s where most of the distressed selling has been, he says. “It’s the better areas that are going to get hit over the next 12 months” as foreclosures mount in those areas.

In Phoenix, which has experienced one of the worst drops in home prices from their peak of any U.S. city, sales-office traffic jumped 55% in the three months through the end of April after 11 consecutive quarters of decline, according to Jim Belfiore, president of Belfiore Real Estate Consulting, a market research firm in Phoenix. Traffic is a leading indicator of where home sales are headed, he says.

Builders’ sales in that area have at least tripled in the past 30 days, due to a big drop in prices from January through early March that narrowed the premium over prices of foreclosure properties to just 15% in most local sub-markets, says Belfiore. Meanwhile, the latest S&P/Case-Schiller data show prices of foreclosures on Phoenix’s multiple listing service up an average of $5 per square foot over the past 30 to 40 days, with demand currently outstripping supply.

Phoenix is being looked at as an indicator of what the nationwide housing market could look like 12 to 18 months from now, he says. The land and lots that most of the publicly traded homebuilders own in and around Phoenix comprise a significant portion of their total holdings, he adds.

Bottom-Fishing in Phoenix

Stevenson at Fox-Pitt characterizes most of those buying homes in Phoenix as “bottom-fishers” who are taking advantage of the supply glut that’s pushed prices to bargain levels. Other reasons the market has attracted buyers: Phoenix is likely to produce one of the higher levels of job growth over the next 10 years, and its climate makes it a preferred retirement destination, he says.

Belfiore concedes that a large percentage of the recent sales has been by investors rather than people planning to move in immediately, and most are resales of foreclosure properties. The majority of new-home sales have been by first-time home buyers, motivated by the federal tax credit of up to $8,000, which is set to expire in November.

The expected increase in foreclosures over the next few months will force homebuilders to lower prices on new homes to be able to compete. Builders who own the land end up building a house and selling it at a price that results in a negative margin just to get the money out of the land, says Stevenson. Normally, however, rather than build at a negative margin, companies will take an impairment charge, marking down the value of the land to where they can afford to sell the houses for less without killing their margins.

Generally, the bigger homebuilders are still reporting impairment charges between $100 million and $400 million per quarter this year, including the cost of walking away from options on land they don’t own and goodwill remaining from past acquisitions, he says.

More foreclosures than new homes

Metrostudy, a national housing market research firm in Houston, is still projecting 490,000 U.S. housing starts for 2009, below the 520,000 to 550,000 forecast by many general economists. Brad Hunter, chief economist and national director of consulting at Metrostudy, recently cited three reasons for the low level of starts: the inventory overhang builders are trying to work off, denial of credit by some builders’ banks even if they’re current on their loans, and the depressed price levels that make it hard for some builders to sell homes profitably.

Housing inventory fell to 10.1 months of supply from 10.7 in March and was well below the peak 13 months of supply, After a couple of strong months, there was a lull in purchases of homes priced between $150,000 and $200,000, which had had the strongest growth, Goldman Sachs said in a May 28 research note. The key to further paring excessive housing supply is a slowdown in foreclosure filings, which Goldman doesn’t see as likely. In March, foreclosure filings were 15% higher than the total inventory of new homes for sale, Goldman said, citing RealtyTrac data.

Do stock-market pros like any names in the battered industry? D.R. Horton (DHI) is one of the stocks favored by James Wilson, an analyst at JMP Securities in San Francisco, who rates it as outperform. He said he expects the company to be among the first to return to profitability starting in fiscal year 2010. “Over 50% of its customers are first-time home buyers, who will be the first, in our view, to enter the market as prices begin the bottoming process and sales start to pick up in certain markets,” he wrote in a May 6 research note.

D.R. Horton had $1.5 billion in cash at the beginning of May and said it was terminating a $275 million revolving credit line due to lack of anticipated need, and as a result saving $3 million in annual non-use fees. The company generated $161 million in operating cash flow in the second fiscal quarter and $978.6 million for the first six months of fiscal 2009. “This puts Horton in a very favorable position to capitalize on attractive land deals as banks and private builders begin to unload assets on the cheap,” Wilson said in his note.

While the company said it’s trying to work down current inventory and is not considering any joint-venture deals, at some point land will become too cheap to ignore, Wilson said. After two straight quarters of impairments below $60 million, the company is nearing the end of its impairments, he said. He expects an additional $65 million in impairments for the current fiscal year, which should bring Horton’s assets close to being in-line with current market values. However Credit Suisse analyst Daniel Oppenheim is less optimistic about the stock, which he rates as underperform, citing risk from mounting foreclosures.

About 320 properties selling for more than $20 million are on the market across the U.S., according to a recent survey by Ultimate Homes. But in the year since the economic crisis began, sales of these ultra-pricey homes have all but stalled even as the bottom of the housing market is showing some life.
Billionaires Regain Confidence

Of course, only a handful of $50 million-plus homes sell even in the best of times. The last major trophy home to sell was Donald Trump’s 60,000-square-foot Palm Beach mansion, which sold to Russian tycoon Dmitry Rybolovlev last summer for $95 million, one of the highest prices ever paid for a U.S. residential property.

“When Lehman Brothers disappeared and the whole economy fell apart in the fall, that put the breaks on luxury,” said Rick Goodwin, publisher of Unique Homes and Ultimate Homes magazines. “The downturn is so severe that it’s even making the well-to-do cautious. People worth $6 billion are suddenly worth $3 billion. It’s a significant jolt, losing half your net worth.”

Luxury realtors are hoping the dry spell is coming to an end. Last month, a 2006 Aspen mansion, including 10 bedrooms spread across 21,400 square feet, sold for $43 million. Earlier this year, pop star Madonna paid $32.5 million for a Georgian-style townhouse on the Upper East Side of Manhattan.

“I don’t want to say everything went dark, but they [the buyers] went quiet” last fall, said Joshua Saslove, the listing broker for the Aspen property. “Now, they’ve reappeared on the horizon.”

Not only are the number of trophy listings growing, but they’re still reaching extraordinary heights.

Topping Unique Homes’ ranking of the most expensive listings last month was the $150 million, 56,500-square-foot estate owned by television producer Aaron Spelling’s widow. In 2005, the top property on the list was $75 million, a price that would have placed it at the bottom of this year’s top 10, Goodwin said.
Best Beaches Fetch Top Dollar

Many of America’s priciest homes happen to be located in beautiful beach locations, in Long Island’s Hamptons or along the coasts of Maine, New Hampshire, Massachusetts, California, Florida, and Hawaii. BusinessWeek.com came up with a list of some of the most expensive beach homes on the market. Topping the list is Sandcastle, a $59.5 million estate in Bridgehampton completed this spring by builder Joseph Farrell, who lives in the house. Farrell is now renting out the 31,000-square-foot beach estate while he vacations with his family in Hawaii. An unnamed tenant, who is paying $425,000 to rent the house for two weeks, will have access to gorgeous ocean views, a two-lane bowling alley, a racket ball court, and an outdoor heated pool with an underwater stereo.

Farrell says he expects his home to sell for a good price, but acknowledged that the pool of luxury buyers has shrunk.

“I don’t think it’s ever going to be same; it’s a new world we live in,” Farrell said. “But if you have the best location and the best product, you can always find a buyer.”

Jonathan Miller, chief executive of real estate appraisal firm Miller Samuel, said sales in the Hamptons were down 43% in the second quarter compared with a year earlier, and the median price was off nearly 17% during the same period.

- Pre-owned, single-family home sales in North Texas dropped nearly 25 percent in May from the previous year, according to the North Texas Real Estate Information Systems Inc. and the Texas A&M University Real Estate Center.

- These sources also reported that May saw the lowest home sales since 2000.

- Median home prices in the North Texas region are down about 4 percent this year, to $139,500.

- Condominium sales in North Texas were down 33 percent for the first five months of 2009.

As sales continue to decline, analysts are closely looking for signs that the market is finally leveling off. Although there are certainly different viewpoints and opinions regarding when this will occur, most analysts agree that both consumer confidence and the job market in the Dallas-Fort Worth metro area need to show signs of improvement before the real estate market can begin balancing out.

Another interesting point is that luxury homes, valued at $1 million or more, were also down a whopping 45 percent for the first, five months of 2009, showing that the recession and housing market slump has affected all classes.

Homes on the market continue to decrease, as well, indicating that many homeowners are simply looking to ride out the storm and list their home when sales begin to pick up. As of May, there were about 40,000 homes listed on the MLS, which is a 10 percent decline from a year earlier.

And Lest we Forget the Sub-Prime Mortgage Mess

There’s one thing for certain: the subprime mortgages are stilling coming back to haunt North Texas. There seems to be a large chunk of homeowners still struggling with their prime adjustable-rate loans. And, although many of the subprime adjustable-rate mortgages have just about finished wreaking havoc on the market, the next round is set to hit, and it doesn’t look good.

We all know what that means – foreclosures. The Dallas Forth Worth area – and for that matter the rest of the country – is still seeing foreclosure numbers hitting historic highs. To give you a good idea of the gravity of the foreclosure mess, consider that there are more than 6,000 homes in the Dallas-Fort Worth area scheduled for foreclosure in July alone, according to the Addison-based Foreclosure Listing Service.

Don’t Count out Dallas Just Yet

There are bright spots on the North Texas real estate horizon. While other parts of the country that experienced a real estate bubble of extraordinary portions, such as California and Florida, are expected to continue to struggle well through 2009 and beyond, many parts of the country – many located in Texas – are expected to recover sooner than later.

Just some of the areas expected to bounce back from the recession and housing market slump are Dallas, Austin, San Antonio and McAllen. The healthy economy of Dallas and other Texas cities comes from its growth in the health care and education sectors.

Luckily, these Texas cities never experienced the housing boom like other areas of the country, and it’s a good thing; for that’s exactly what is propelling them toward a swift recovery.