Checking the Health of the Housing Recovery

(page 2 of 2)

One positive sign: Banks already have been liquidating foreclosed homes throughout 2009, often at deep discounts. And despite the desperate deals made by these sellers, home prices have essentially moved sideways this year, Strauss notes. The median price in October was only $1,600 below its level in May.

Government Policy

Two federal policies seem to have provided a boost to the housing market this year: A tax credit provided incentives of up to $8,000 to new-home buyers, and the Federal Reserve has purchased mortgage securities in an effort to keep mortgage rates low.

The tax credit has been extended until the spring of 2010. The future of the Fed's mortgage program is an open question. At some point both stimulus programs will need to end. The government "needs to demonstrate the economy is able to stand on its own two feet," Sheldon says.

The good news is that the housing market probably has at least another six months to burn off inventory with government encouragement, says O'Rourke. "We want to continue to see this inventory worked off." Once the number of unsold homes stabilizes, the market can operate more normally.

"Presumably at a certain time the housing market will have some momentum of its own," Englund says. When stimulus is withdrawn, "the goal is to have self-sustaining increases in the housing sector."

The Broader Economy

Problems in the housing market arguably caused the financial crisis and led to the recession. But a sustained improvement for housing might need to wait for the economy to recover on its own. The job picture, in particular, is crucial for residential real estate. "As long as people are employed, they are more likely to be current on their mortgage," Gambera says.

Demand for housing is driven by demographics—the number of new households being created—and the jobs picture. Strauss notes that demographic trends are actually favorable. "But right now those are being more than offset by current economic conditions," he says.

If you want to know how much your house will be worth in a year or two, you might be better off watching the labor market than the housing market. And because real estate conditions often vary greatly from region to region, the most crucial metric may be the local job picture.

Steverman is a reporter for BusinessWeek's Investing channel.

Business Exchange

Track and share business topics across the Web.