Housing's Long and Winding Road to Recovery

The latest U.S. housing data contain both disappointing and encouraging news. First the bad news. The latest S&P/Case-Shiller Home Price Index for the top 20 and top 10 cities showed a near-universal decline in prices in the nation's major metropolitan areas, year over year. In November, the 20-city index fell 1.6%, and the 10-city index fell 0.4%, over November 2009.

The prices fell even compared to the previous month: From October to November, the 20-city index fell 1%, while the 10-city index declined 0.8%. Equally distressing, only one city -- San Diego -- in the 20-city index saw a gain from October. And it wasn't much: 0.1% -- hardly enough to warrant singing "California, Here I Come."

Cities that recorded large declines include Detroit, down 2.7%; Atlanta, 2.5%; Chicago, 2.2%; and Cleveland, 2%.

Combine those drops with substantial losses in New York, down 1%; San Francisco, 1.2%; Seattle, 1.1%; and Boston, 1%, and prices are falling at a scope and rate to warrant increasing concern about a double-dip recession in home prices.

A Pickup in Existing Homes

Now the good news. The latest Case-Shiller data is two months behind current conditions, and the more recent data from other housing researchers shows a slightly different picture.

In December, sales of existing homes jumped 12.3% to an annual rate of 5.28 million, according to data compiled by the National Association of Realtors. That's below the 5.44 million-home rate for the same month a year ago, but it's still well above the 40-year average of roughly 3.66 million homes.

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So, existing-home sales have clearly rebounded, even though they're substantially below the 7.1 million annual rate reached in 2005, during the housing bubble. It'll be a long time before anything like that rate is seen again.

With existing homes selling at a decent clip, why does it feel like this market isn't gaining traction?

One reason may be the housing euphoria triggered by the 2003-2007 bubble era, which makes the current rate seem like a letdown. Another factor is probably the large supply of unsold existing homes. Inventories slid to an 8.1-month supply in December from 9.5 months in November, but they remain above the three- to five-month average supply of a healthy market.

Excess inventory is one reason why median U.S. existing-home prices have remained virtually unchanged in the past year. The median price totaled $168,800 in December, down 1% from $170,500 in the same month in 2009. That probably accounts for the lack of buzz. Existing homes are selling, but prices are just treading water.

New-Home Sales: Still Too Low

As for new homes, the progress during the past six months has been roughly equivalent to driving on the Washington, D.C., Beltway during rush hour: You're moving, but not very quickly.

New-home sales rose a better-than-expected 17.5% in December from November to a 329,000-home annual rate, but that gain comes from a very low starting point: New-home sales fell to a 47-year low -- to an annual rate of 274,000 homes -- last August, and remained low in November.

Inventories of new homes fell to a 6.9-month supply in December from 8.4 months in November, but it's still high. Even assuming strong U.S. GDP growth of 4%, it will take at least three quarters -- and probably longer -- for new-home sales to return to a more normal 700,000 to 800,000 annual rate. And the days of selling more than 1 million new homes a year, such as during the housing bubble, appear to be long gone -- an anomaly of that era.

What Not to Expect

While the housing sector still can't be called healthy, the existing-home and new-home sales data from late autumn show that it has made modest progress. And while one could make a case that housing -- at least from a price standpoint -- is flirting with a double-dip recession, one also could argue that the dip won't be as deep or as long as the dive that occurred in the Great Recession.

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In general, housing remains a buyers' market, not a sellers' market. That means even though local price booms can occur quickly, people buying homes in the next several months shouldn't assume that their new purchase will automatically appreciate 5% to 8% per year. The market just hasn't recovered nearly enough to expect those kinds of gains anytime soon.

Finally, don't expect federal policy, such as a second renewal of the homebuyer credit, to help. Congress is in austerity mode and is more likely to cut spending than to grant tax credits that lower Uncle Sam's tax revenue.

Still, while the housing sector's progress remains sluggish, it is in fact making progress. Further improvement will depend on the country's ability to create and sustain jobs.