True Housing Recovery Depends on Prices

By MARK GONGLOFF Like the economy, the housing market seems on the threshold of recovery. But it might not cross it soon. This week brings a fresh slew of housing data. The Standard & Poor's/Case-Shiller home-price index for March is due Tuesday, the National Association of Realtors releases April home-resale data Wednesday, and the Census Bureau releases new-home-sales numbers Thursday. A consensus is forming that home sales and construction are at long last bottoming and may soon rise. Economists largely expect this week's numbers to affirm that notion. A full recovery for housing, and maybe the broader economy, depends on a third step: Prices must stop falling. On that front, as with other economic data, the "second derivative" is improving -- things are still getting worse, but at a slower rate. Unfortunately, the day when prices start rising might still be far away. That is mainly due to a dizzying supply of housing, which can keep a lid on prices even as demand rises. This glacier is melting slowly: Existing-home inventories are down to 9.8 months' supply, higher than their long-term average of six months, but off their recent peak of 11.3 months. There is a massive shadow inventory of bank- and investor-owned homes, enough to push existing-home supply to 12 months, notes David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm. Some parts of the country have bigger gluts than others, notes Barclays Capital economist Michelle Meyer. Many of those areas, particularly Nevada, Florida, Michigan and California, also have unemployment rates above the national average, inhibiting demand. Many areas with big overhangs also are riddled with distressed sales, which comprise more than 50% of total sales in some metro areas of California, Arizona and Nevada. Healthier regions, including "many parts of the Northeast," have only just begun to suffer price declines, Ms. Meyer says. Together, these factors could drag on prices through much of 2010, pushing the Case-Shiller index to a total decline of 40%, she estimates. So far, it's off 27%. As long as prices are falling, banks will take more losses, consumers will feel cautious and the economic recovery will be tenuous.