Housing Recovery Obstacle: So Many Houses

By MARK GONGLOFF Investors expecting an upbeat chapter for housing should brace for a plot twist. Two key pieces of housing data arrive this week, starting with August home resales, due Thursday from the National Association of Realtors. Economists think existing homes sold at an annualized rate of 5.39 million units last month, up 9% from a year earlier. On Friday, the Census Bureau reports new-home sales for August. Economists estimate an annualized sales pace of 440,000 units, flat from a year earlier. Both reports could add to a snowballing consensus that housing is rebounding. A vigorous recovery would be manna for the economy. Home sales spur purchases of fridges and lawn mowers, and rising prices make consumers wealthier and heal bank balance sheets. But there are reasons to expect a halting recovery at best. First, the recovery has leaned heavily on tax credits for first-time home buyers and the Federal Reserve's buying of most new mortgages to keep rates low. The Fed on Wednesday said it would slow its pace of purchases, and the tax credit is set to expire in November. Meanwhile, an unemployment rate pushing 10% and tighter credit standards are a drag on housing demand, offsetting high affordability. More important, there are still too many houses on the market -- 9.4 months' worth of existing homes for sale in July, according to NAR data. The backlog is usually closer to six. Nearly seven million housing units will eventually enter foreclosure, mortgage-backed-securities strategists at Amherst Securities Group, a brokerage firm that deals in MBS, estimated on Wednesday. That could add 1.35 years' worth of inventory to the market. That isn't necessarily a bad thing. Foreclosure sales have provided steam for the broader housing recovery. But that momentum is petering out. Thanks partly to the effects of government loan-modification programs, there isn't enough foreclosure inventory on the market to keep the recent gains going, says Mark Hanson, president of the Field Check Group, a California research firm. California, for example, has seen its available foreclosure inventory slim. That could explain why, according to data tracker DataQuick, California home sales fell nearly 12% month-over-month in August. Write to Mark Gongloff at mark.gongloff@wsj.com