With foreclosures rising, why is housing market improving?

Pending home-sale transactions rose in June. Low mortgage rates and affordable home prices seem to be stabilizing the market.

Mark Duncan/AP/FILE
In this photo taken on July 15 weeds grow in the lawn of a boarded up home in Cleveland.

The US housing market shows signs of progress, even in the face of a rising and record tide of foreclosures.

On its face, that sounds incongruous.

All those loan defaults, unmowed lawns, and fire-sale auctions of bank-owned homes aren't indicators of stability, after all. Many forecasters say foreclosures may not peak until some time next year or even 2011. That would exert downward pressure on home prices, particularly in certain hard-hit metro areas.

Yet, broader indicators of the housing market paint a more encouraging picture – that a bottoming out is under way.

The number of pending home-sale transactions rose in June and outpaced forecasts, according to numbers released Tuesday by the National Association of Realtors. Home-price indexes have also reversed gear and risen in the past two months, despite the downward pressure imposed by foreclosures.

"The latest numbers on housing prices are really pretty encouraging," says Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. And after a steep three-year contraction, "residential construction will probably start adding to economic growth in the third quarter."

In short, foreclosures are a problem but the housing market is guided by other forces, too.

A bottoming out?

“Low mortgage interest rates, affordable home prices, and large selection [of homes] are encouraging buyers who’ve been on the sidelines," Lawrence Yun, chief economist at the National Association of Realtors, said in a statement accompanying the pending-sales figures Tuesday.

Mr. Newport figures that residential construction and home-sale transactions have hit bottom in recent months. On home prices, "we may be nearing a bottom, but it's too soon to tell," he says.

For one thing, price indexes can be skewed by the types of homes sold in a given month. But at the very least, stabilization in home values appears to be drawing closer.

Meanwhile, it's proving harder to make headway on foreclosures. A record 1.37 percent of the nation's roughly 50 million mortgage loans went into foreclosure in the first quarter of 2009 (the latest quarterly number from the Mortgage Bankers Association). That's up from about 1 percent a year earlier. Another 9 percent of loans were at least a month delinquent, also a record in data kept since 1972.

Foreclosures kept high by unemployment

The foreclosure trend is fueled by several forces. Topping the list are rising unemployment rates and an increase in "negative equity" borrowers (about 1 in 5 borrowers have loan balances that exceed the home’s value). Also, monthly mortgage payments are due to rise next year on many high-risk mortgages.

In a bid to avoid preventable foreclosures, the Obama administration on Tuesday called on banks and loan servicing firms to ramp up the pace of modifying the terms on at-risk loans.

Loan modifications are only a partial answer to the problem. If home prices stabilize, that could be another important piece of the puzzle, ending the increase in “negative equity” households. And if the unemployment rate stops rising by the middle of next year, as Newport predicts, that could be the most important help for homeowners.

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