The Overhang in Housing Hangs Around

The housing market is still crucial to the recovery of other markets, yet it still hasn't found a bottom. Fresh evidence is being hauled out by the unpleasant truckload this week. Wednesday brings home-resale data from the National Association of Realtors, and the Commerce Department on Thursday reports new-home sales. Economists estimate that both measures fell modestly in January, following a December in which foreclosures boosted existing-home sales but crushed new-home demand. Optimists have shreds of hope that a turn is near. Prices are off 27% from their 2006 peak, according to Standard & Poor's/Case-Shiller data released on Tuesday. And the massive overhang of housing inventory is eroding: Construction has nearly ground to a halt, and the supply of existing homes tumbled in December to 9.3 months from 11.2 months in November, the biggest decline since the NAR started keeping track in 1999. But the inventory figures aren't seasonally adjusted, and they will rebound this spring if sellers tiptoe back into the market. Speculators have done much of the distressed buying lately and aren't loath to dump houses back on the market if they have to cut losses. Supply is still nearly twice its "normal" level of about five months, last seen in March 2006. That level probably won't return until at least 2011, Barclays economist Michelle Meyer estimates. "As long as we have this overhang, particularly in this environment with so many distressed homes, prices are likely to fall," Ms. Meyer says. Prices still are too high compared to rent and income and seem well on track for at least a 40% peak-to-trough decline. That would generate still more losses for banks, threatening fresh turmoil for markets and the economy. Here's hoping the government uses realistic housing scenarios when it stress-tests banks, starting on Wednesday.