Glimmers of hope in mixed housing data

A man works on a new home being built by developer Azeem Kahn in Chicago April 21, 2011.

NEW YORK (Reuters) - The "shadow inventory" of U.S. homes likely to come up for sale soon declined in early 2011 and a measure of house prices unexpectedly rose in April, providing rare cause for optimism in the battered housing market.

Wednesday's data seemed to be in line with broad expectations that the housing slump could play itself out this year before a gradual recovery gets underway in 2012. But economists cautioned the outlook is still bleak.

Despite the decline in shadow inventory -- homes in foreclosure or whose owners are behind on mortgage payments and real estate seized by lenders -- they were still at historically high levels in the three months to April.

Weak consumer demand and a glut of available inventory has kept prices low. The sector has struggled to recover, lagging other areas of the economy.

"If it was merely tied to a weak economy and high unemployment, the low interest rates we have would have stimulated some sort of recovery, but that is not the world we're in," said Steve Blitz, senior economist at ITG Investment Research.

Demand has faltered since a first-time buyers tax credit expired last year.

Federal Reserve Chairman Ben Bernanke, speaking after the conclusion of a Fed policymakers meeting on Wednesday, stressed the importance of working off the pent-up supply of homes poised to come on the market and depress property prices.

A report on Tuesday showed May sales of existing homes fell to a six-month low, although the National Association of Realtors said indications were that pending contracts for May rose by at least 15 percent.

Another report on Wednesday showed applications for mortgages fell last week.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, dropped 5.9 percent last week. While the data tends to fluctuate week to week, it has been largely moving sideways since March.

In a positive sign for the market, the Federal Housing Finance Agency said its home price index rose 0.8 percent in April, the first monthly gain since May 2010.

"The strong gain in April was unexpected and presents some of the first positive news on home prices in almost a year," Michael Gapen, an economist for Barclays Capital, said in a research note. He said improvements in the economy should boost demand for homes, alleviating some of the pressure on prices from unsold homes.

The shadow inventory data showed modest improvement, with the number of homes likely to hit the market dropping to 1.7 million, equivalent to 5 months' supply. That was down from 1.9 million in the same period last year, according to CoreLogic, which cited fewer new delinquencies and a high level of distressed sales.

A healthy market would normally see shadow inventory of one month's supply or less, said Mark Fleming, chief economist for CoreLogic, in Washington, D.C.

"That's going to take a number of years to happen," he said. "The good news is it's not getting any worse and it's slowly beginning to get better."

Bernanke said it was important to continue to modify loans for homeowners struggling to make their mortgage payments. But he added that speeding up the process of foreclosures would also help clear the market.

Bernanke said the steps would "get these homes out of the pipeline and allow people to operate in a market where they are more confident that prices will be stable rather than falling."

The Fed chief also noted that tighter credit rules are keeping a third of Americans -- who used to qualify for mortgages -- from getting loans, which depresses demand further. (Additional reporting by Leah Schnurr; Editing by Dan Grebler)