More Trouble Brewing on the Home Front?

More Trouble Brewing on the Home Front?

Improving data on new home construction and existing home sales provide the strongest evidence yet that the U.S. housing market is in the midst of a nascent recovery. Unfortunately, concerns are aplenty that several issues could throw a monkey-wrench into things and turn the recovery into a falling house of cards.

For example, a big chunk of recent sales activity has been distressed properties (foreclosures or short sales). While this is a necessary part of the market-clearing process, the fact that foreclosures remain such a large share of the resale market only adds further pressure to prices and increases the probability of default for other homeowners as their loans fall further and further underwater. Even some of the most creditworthy households have defaulted on their mortgages, as evidenced by the fact that nearly 1 in every 10 prime loans was either past due or foreclosed upon as of the second quarter of 2009. Moreover, foreclosure activity is not expected to peak until late 2010 and the Obama administration's efforts to forestall foreclosures will likely remain overwhelmed because of the poor state of the labor market.

Existing home sales have also been juiced up by first-time homebuyers entering the market in droves, spurred on by pent-up demand, extremely-low mortgage rates, favorable price-to-rent ratios and a federal tax credit. Reports from realtors show a lot of buyers entering the market not only because they see incredible bargains after being all but priced out during the boom years, but also due to the fact that they fear missing out on the tax credit since it expires later this year. Once this sweetener is taken away, marginal first-time buyers might lose interest in making a purchase.

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