Denver is the Most Improved U.S. Housing Market

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Also, fewer new constructions, moratoriums on foreclosures, and loan modifications over the past year have limited the supply of foreclosed homes on the market.

Government life support has boosted the economy, but "the issue is what happens when you reprivatize the market," he says. In many cases, these programs delayed inevitable foreclosures. "We've got our foot on the gas pedal pressed to the floor, but it's not sustainable."

Brokers expect sales to slow this summer, as a large number of buyers signed contracts before the April deadline for the federal credit. In the Denver area, homes under contract in May dropped by 39.3 percent from April and 27 percent year-on-year, according to data from Metrolist, the real estate Multiple Listing Service (MLS) for the area.

Bids Above Listing Prices

California had six metros on our list of improving markets but remains volatile. Zillow's chief economist, Stan Humphries, says California is now experiencing a boom because its housing market went into recession earlier and it had already experienced tremendous declines in home values. Also, state foreclosure laws do not require court action, so foreclosures can be dealt with efficiently. "You can clear through the foreclosure backlog fairly quickly," he says, so markets can bottom out and start to heal.

C.J. Brasiel, a broker in San Jose, Calif., says that since October, her listings have moved quickly, and she has received bids above the listing price for many homes. Sales activity has improved, but more than 70 percent of Brasiel's listings last year were distressed properties, and about half her sales were foreclosed homes.

If first-time buyers retreat following the expiration of the federal tax credit and banks release foreclosed homes on to the market, increasing supply, Brasiel says prices could drop more than 5 percent in some areas in Santa Clara County this summer, unless there are government interventions to mitigate a flood of shadow inventory. "We'll be bumping along the bottom," she says.

Optimism About Next Year

Despite the projected dips over the next months and years, an end is in sight. An April report on the Fiserv-Case Shiller home price indexes says a prolonged recovery will begin early next year, and some markets are poised for a relatively fast recovery, including those that did not see large price declines, such as Pittsburgh, Columbia, S.C., and metro areas in Texas, Washington state, and upstate New York.

Nationally, Zillow's Humphries expects the market to bottom in the third quarter and be flat for the next three to five years as the market works through foreclosures, shadow inventory, other economic issues.

CoreLogic's Khater sees a need for a correction. "When you adjust for inflation, which until recently was 2 percent to 3 percent a year, then prices should return to roughly 1997 rates," he says. "We're not that far off from late 1990s in terms of wealth and income when adjusting for inflation, so home prices should not be much higher than that."

Rising home prices may be encouraging, but in the long term, they will need to climb out of the recession in step with the rest of the economy—even though many would like to see them race ahead.

Click here to see which markets show the most improved housing markets.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

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