Home sales rise in September, but a housing glut and concerns remain

The pace of home sales gathered steam in September, a welcome sign for a housing market that remains troubled across much of the United States.

Previously owned homes sold at an annualized pace of 4.53 million units, up from 4.12 million a month earlier, the National Association of Realtors reported.

But the Realtors report also noted a decline in the median price of homes compared with a year ago, consistent with concerns among some analysts that foreclosures and a still weak economy could further depress housing prices, which in turn could lead to more loan defaults.

The reported monthly improvement follows a sharp decline in sales activity in mid-summer, as a special federal tax credit for home buyers expired.

Despite the progress, home sales remain weak relative to the large supply of homes for sale. Some 4 million homes are on the market, representing a supply that would take 11 months to sell at the current level of activity. That's down from the 12-month supply of homes that existed in August, according to the Realtors association. But the housing market hasn't seen a more normal supply of six months-worth or so since the onset of recession in 2007.

The improvement in home sales also could face a new headwind: concern that legal wrangling over foreclosure documentation could curb the flow of distressed properties onto the housing market. The paperwork problems could also dampen the spirits of homebuyers, if they worry about whether they'll be able to obtain a clear title to a home.

'Relatively good news'

"This report is relatively goods news, but the housing market situation has a long way to go before it fully recovers," Chris Christopher, an economist at IHS Global Insight, said in an analysis of the new numbers. "The question remains of the impact of the foreclosure debacle that reared its ugly head in the latter part of September."

Mr. Christopher says the main drag on the housing market, however, is something simpler: employment conditions. The more the job market begins to improve, he says, the more that should translate into home-buyer confidence.

The Realtors report said that despite the one-month increase, the pace of home-sale activity in September was still 19 percent lower than the same month a year ago, which saw annualized sales of 5.6 million homes. The median sales price this September was $171,700, down slightly from about $176,000 a year ago.

All four major regions of the country showed a rise in sales volume.

“A housing recovery is taking place but will be choppy at times," predicted Lawrence Yun, chief economist for the Realtors association, in a statement accompanying the numbers. "But the overall direction should be a gradual rising trend in home sales with buyers responding to historically low mortgage interest rates and very favorable affordability conditions."

Some economists worry about a riskier scenario, however. They warn that the combination of a weak economic recovery and a high number of foreclosures could push home prices downward in the months ahead. That in turn could push more borrowers "under water," with loan balances larger than the value of their homes. The result could be to increase the number of borrower defaults.

While not making a housing-market prediction, Federal Reserve Chairman Ben Bernanke pointed to the problem in a Monday speech.

"More than 20 percent of borrowers owe more than their home is worth," Mr. Bernanke said. "An additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further."

At a conference co-sponsored by the Fed on Monday, housing experts offered differing prescriptions. Some said that additional efforts to prevent foreclosures might not do much for the economy. Others called for a more aggressive effort to keep borrowers in their homes if possible.

'Lost decade'

"Maybe we're looking at a lost decade for the US economy," without new housing-market intervention, said Adam Levitin, a Georgetown University economist.

Mr. Levitin outlined two possible approaches, both aiming to overcome the challenge that key intermediaries in the mortgage market – loan-servicing firms –have been relatively slow to offer loan modifications to delinquent borrowers, even though that may be in the best interest of borrowers and creditors alike.

In one approach, state attorneys general might prod loan-servicing companies to allow a third-party ombudsman to decide whether borrowers can get a loan modification, rather than foreclosure.

In the other approach, he says, the federal government would impose a streamlined process by which several millions of borrowers would get a loan modification or not, depending on their ability to finance a mortgage after a principal writedown (to reflect the current value of their home). The effort could require political courage, if it forces banks to write off big losses on second-lien mortgages.

The most likely path, Levitin said, is that the current "muddle through" strategy will continue, despite the risk of a lost decade.