Real Estate February 23, 2010, 10:10PM EST

Housing Upturn Proves Elusive

Despite some signs of improvement, pessimism abounds about the U.S. housing market. The top worry: the withdrawal of government stimulus in the next few months

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The rest of the U.S. economy may be bouncing back, but for the battered housing sector, the hopes of economists and real estate experts are still modest.

"Recovery is probably too strong a word," First American Funds Chief Economist Keith Hembre says of recent housing data. Call it "stabilization at a lower level."

Home prices and buying activity are coming back, but only from a disastrous 2009. In the first quarter of 2009, for example, the Standard & Poor's Case-Shiller National Home Price index dropped 19% from the year before. In the last quarter of 2009—for which data were released on Feb. 23—the index was down just 2.5% from the year before.

"We're showing signs of the housing market bottoming," says Michael Strauss, chief economist at Commonfund. "The bad news is we still have a long way to go."

The widely watched S&P Case-Shiller 20-City Composite Home Price index rose 0.3% from November to December. But the figure only increased when adjusted for the winter slowdown. Without a seasonal adjustment, home prices fell 0.2% from month to month.

Government Support to End

Improvements have occurred only after extraordinary efforts by the U.S. government to prop up the housing market. To lower mortgage rates and heal financial markets, the U.S. Federal Reserve has been buying up to $1.25 trillion in mortgage-backed securities. To bring more buyers to market, Congress approved, and then extended, an $8,000 first-time home-buyer tax credit.

"Even with these dramatic efforts to bolster home sales, they're still languishing at recessionary levels," says David Rosenberg, chief global economist at investment manager Gluskin Sheff & Associates.

And now comes 2010's big test for the housing market: The Fed's mortgage-buying will end at the end of March, and the home-buyer tax credit expires at the end of April.

What happens without government support? "I see no evidence that this is a sector that has the capacity to stand on its own two legs," Rosenberg says.

Real estate professionals are worried, too. Earl Lee is president of Prudential (PRU) Real Estate, which has 2,000 franchised real estate offices in North America and employs 62,000 real estate agents.

"The first half of the year will be strong," Lee says. "The question is what will [the second half] look like." Without government support, he adds, "the economy is still not strong enough."

Bright Spots

There are bright spots in the housing market, and they're often in places hardest hit by the bursting of the real estate bubble. In December's Case-Shiller data, only five cities did not see prices decline before adjusting for the season: San Diego, Las Vegas, Los Angeles, Phoenix, and Detroit.

In the upscale Detroit suburb of Birmingham, M. Michael Cotter, a real estate broker at SKBK Sotheby's International Realty, says he has seen a "rather substantial improvement" in the housing market in the last three months.

After local giants General Motors and Chrysler declared bankruptcy last year, Detroit's already weak real estate market fell into the doldrums. Now, "there is optimism that we didn't have a year ago," Cotter says. Though conditions could be much better, he says, "the economy is starting to right itself."