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Sales May Be Up, But Housing Won't Recover Until Jobs Come Back

Housing sales were up yesterday, but that belies a wider problem: unemployment is the key metric for the housing market. As unemployment cruises past the current level of 9.5 percent, foreclosures continue to grow and that weighs down housing prices. The market won't really turn around until employment does.

Existing home sales rose for the third straight month, according to the National Association of Realtors. Home sales increased 3.6 percent to a seasonally adjusted rate of 4.89 million units in June, up from 4.72 million in May and only 0.2 percent lower than June 2008. The last time home sales rose for three consecutive months was in 2004 at the height of the housing boom.

According to the realtors' association, the national median price for a home was $181,000, which is 15.4 percent lower than June 2008. Foreclosures and distressed properties accounted for 31 percent of the sales in June.

Analysts were being super cautious about a possible housing recovery. "We do not believe this is indicative of a bottom being reached," said Credit Suisse analyst Daniel Oppenheim. "Rather we think it reflects a shift in the mix of homes being sold." Fewer low-priced, foreclosed homes were purchased, he said, and more higher-priced homes have been sold compared with earlier months.

The NAR said the total housing inventory at the end of June fell 0.7 percent to 3.82 million existing homes, which is a 9.4 month supply. That's down from a 9.8 month supply in May and a good sign. Fewer homes for sale means less downward pressure on prices.

Federal Reserve Chairman Ben Bernanke alluded to the foreclosure problem during testimony this week before Congress. "The combination of unemployment and falling house prices - the double trigger - does create a very high level of foreclosures," Bernanke said. "Our assessment of the foreclosures is that it's likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate and, perhaps, be somewhat less in 2010."

Even perennial housing optimists such as the National Association of Homebuilders, which reported an increase in homebuilder confidence in June, also warned about the impact of foreclosures. "A true recovery in the housing market and overall economy cannot take place until the continuing foreclosure crisis is abated and a decent flow of credit is restored to housing production," said Joe Robson, a Tulsa homebuilder and chairman of the group. "Meanwhile the stalled jobs market is a major concern to builders and potential home buyers alike."

In addition to rising sales, there has been some other positive news on the housing front: housing starts are also reported to be rising. According to the Commerce Department, housing starts in June rose 3.6 percent to a total of 582,000 privately owned homes compared with 562,000 in May. That's the highest since November 2008, but still down 46 percent from the level in June 2008.

Another gauge of the health of the housing market -- building permits -- rose substantially in June. The 563,000 permits in June were 8.7 percent above the level in May, the Commerce Department said.

The improved numbers are having a positive impact on homebuilders. The XHB exchange-trade fund, which represents a basket of homebuilder shares, was at $13.37 yesterday, up 67 percent from its low on March 9. That's one of the best performing sectors in the stock market. Homebuilder NVR, for example, reported second quarter earning declined sharply to $6.79, but that was still far higher than analysts' estimates of $4.11 per share and the stock surged.
While the increase in sales of existing homes is a definite plus sign, a real return to a robust housing market depends to a large degree on slackening unemployment. And with the economy still continuing to slog along at a reduced pace -- the country is still officially in recession -- that is unlikely to happen until at least the second half of 2010.