June 26, 2008 / 2:09 PM / in 10 years

Bright spots amid battered housing market

NEW YORK (Reuters) - The country is still in the throes of the worst U.S. housing market downturn since World War Two, but glimmers of hope emerged amid a deluge of data this week.

New home construction in Carlsbad, California June 24, 2008. REUTERS/Mike Blake

The median national home price sank further in May and inventories linger at record-high levels, but some of the data suggests the flood of bad news may be leveling off.

The fate of housing is integral to the U.S. economy, and after the market’s downfall severely sapped growth in recent quarters, any signs of recovery could also signal a turnaround for the world’s largest economy.

The Federal Reserve is also concerned. In its latest policy statement published on Wednesday, the central bank cited the “ongoing housing contraction” as one of several factors likely to weigh on economic growth over the next few quarters.

“We are at the beginning of the end of the downturn,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

“It will be a long painful ending, but this is the first step in bringing the downturn to a close,” he added.

The median home price sank 6.3 percent from a year ago in May, the National Association of Realtors (NAR) reported on Thursday, yet existing-home sales rose 2 percent and pushed the inventory of unsold homes down by 1.4 percent to a 10.8 months’ supply at the current sales pace.

On Tuesday, the Standard & Poor’s widely watched S&P/Case-Shiller Home Price Indices for April showed home prices extended their record annual slump, but the pace of monthly declines had slowed for most of the markets it tracks.

While this is a positive sign, an unwieldy supply of homes for sale — buttressed by surging foreclosures — indicates that the moderation in the pace of home price declines should be viewed with caution, Goldman Sachs said in commentary on Tuesday.

Zandi said home prices, based on the S&P/Case-Shiller data, have fallen about 15 percent and he is expecting them to drop another 10 percent before reaching a trough in the spring of 2009.

Home prices have been deflating. While that is not a positive development for homeowners, it is luring buyers.

Zandi said construction and housing starts will bottom in the fall.

The NAR data showed the level of existing homes supply is still lofty. Most economists contend an unwieldy supply is one of the biggest factors preventing the U.S. housing market from rebounding out of its two-year-long slump.

The inventory of new homes available for sale in May dropped 1.7 percent to 453,000, which was the 13th consecutive monthly decline, government data showed on Wednesday. Sales of newly built single-family homes fell 2.5 percent in May to an annual rate of 512,000 units and were down more than 40 percent from a year ago.

Builders have slashed housing starts aggressively, helping pare the inventory of homes for sale, a bright spot amid the gloom, said Mike Larson, a real estate analyst at investment firm Weiss Research in Jupiter, Florida.

“That’s still about 125,000 units above the long-term, historical average,” Larson said. “But you have to start somewhere, right?”

But home builders are feeling the pinch.

Lennar Corp (LEN.N), the second-largest U.S. home builder, reported a bigger-than-expected quarterly net loss on Thursday. Conditions in the industry will worsen before they improve.

It is still too early to call a bottom in the home sales market, but the vast majority of the declines in sales are behind us, according to Adam York, economic analyst at Wachovia Corp in Charlotte, North Carolina.

“Both the new and existing home market are showing less severe declines,” he said.

The tightening mortgage market, however, is complicating matters.

U.S. mortgage applications fell for a second consecutive week to their lowest level in nearly 6-1/2 years last week, the Mortgage Bankers Association said on Wednesday.

It did not help that the 30-year fixed-rate mortgage averaged 6.45 percent for the week ending June 26, the highest since the week ending August 23, 2007, according to Freddie Mac.

“The industry is battling tighter lending standards, slumping consumer confidence, rising unemployment, and more recently, higher fixed mortgage rates,” said Mike Larson, a real estate analyst at investment firm Weiss Research in Jupiter, Florida.

Moody’s Economy.com’s Zandi said that while the housing market has turned a pivotal corner, the time may not be ripe to enter the market, either.

“I do not want to suggest that people should go out and buy a home, but it is very much a buyer’s market and will remain so well through the remainder of the decade,” he said.

Editing by Jonathan Oatis

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