Relapse or recovery for housing market?

While Obama's housing rescue efforts got off to a slow start, there appear to be some signs of a housing recovery. But growing unemployment and looming foreclosures could quickly put a damper on these tender green shoots.

First the positive signs. Some big cities showed substantial improvement in reducing foreclosures in the last six months. This includes the Greater New York area with 23.5 percent fewer foreclosures, Boston with 40.7 percent fewer filings and Houston with 31.3 percent fewer filings. We're even seeing improvement in some of the worst hit spots, such as Central Valley cities in California where foreclosure rates are dropping. The highest foreclosure rates remain in the same four states -- California, Florida, Arizona and Nevada, with 29 of the top 30 places.
After meetings with the Obama administration, lenders agreed to modify 500,000 loans by November 1. Since the program was announced in February only 200,000 homeowners got help. Starting Aug. 15, people with FHA mortgages will also be able to seek help. The FHA will allow lenders to set aside up to 30 percent of the total principal balance until the house is sold or property refinanced, which will help to significantly lower payments. No interest will be charged on the set aside balance.

Another sign that recovery is on the way is that house prices appear to be stabilizing. Tuesday's S&P/Case-Shiller price index showed that single family homes rose 0.5 percent from April to May. That's the first monthly increase since 2006. The federal government also reported an 11 percent rise in new home sales from May to June, which is the largest monthly gain in nine years.

While these positive moves may mean a recovery is on the way and help to stem more foreclosures, the growing numbers of unemployed will mean even more people will need help to stay in their homes. Some proposals are on the table to provide grants or loans to help the unemployed stay in their homes, but there isn't much support for them in Congress at this time.

We've been through two foreclosure waves. The first wave was the investors and subprime borrowers who lost their homes or walked away from them. The second wave included people who lost their jobs, as well as additional subprime and prime borrowers who saw their mortgage payments jump as their exotic loans reset. The next wave could be option-ARM resets which will start soon and continue through 2010. Some of these borrowers are being helped with Obama's refinance program, so hopefully the potential number of foreclosures will be reduced in this third wave.

Even if we are seeing the early signs of a recovery, we could relapse as option ARMs reset and unemployment rates continues to rise, so I don't think we're out of the woods yet. We need to stay on the path of reducing foreclosures by whatever means possible and reducing the backlog of homes on the market, whether from foreclosure, resales or new homes. Downward price pressure will continue to be a drag on the market as long as homes continue to sit for months, and some for years, unsold.

Even if we are in the early stages of recovery, expect that recovery to be very slow until both foreclosure and unemployment numbers start to drop dramatically, which may still be at least a year off.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask About Buying Foreclosures and The Complete Idiot's Guide to Improving Your Credit Score.
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