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Why the housing recovery remains a long way off

(MoneyWatch) It's another mixed week for housing news. Home prices remain affordable and mortgage rates low, but the shaky labor market and ongoing wave of foreclosures continue to dampen the housing sector.

So-called short sales of homes -- where properties are sold for less than what is owed on a mortgage -- have yet to surpass the sale of foreclosed houses nationwide. That has many analysts skeptical that a full recovery is imminent.

"The recovery is happening, though not at a breakout pace, but we have seen nine consecutive months of year-over-year sales increases," said Lawrence Yun, chief economist for the National Association of Realtors in a statement Thursday.

Home sales up from 2011

Home sales were down slightly last month, but are trending positively for the year. According to NAR, total existing home sales declined 2.6 percent from February to March to a seasonally adjusted annual rate of 4.48 million. Year-over-year, existing home sales increased 5.2 percent.

"Existing home sales are moving up and down in a fairly narrow range that is well above the level of activity during the first half of last year," Yun said. "With job growth, low interest rates, bargain home prices and an improving economy, the pent-up demand is coming to market and we expect housing to be notably better this year."

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Nationally, the average price for existing homes was $163,800 in March. That's a 2.5 percent increase from the same time last year. (Just remember national numbers may not reflect what's going on in your neighborhood.)

Distressed sales slowing rebound

Distressed homes are still preventing a more substantial recovery. Homes sold as foreclosures or short-sales accounted for 29 percent of March sales, according to NAR. Of those distressed homes sales, 18 percent consisted of foreclosures, down 2 percent from February. Foreclosure sold for an average discount of 19 percent below market price in March.

More than 100,000 properties nationwide started the foreclosure process in March, up 7 percent from February, according to market research firm RealtyTrac. Despite the month-over-month surge, that represents a drop of 11 percent in foreclosure filings from March of 2011.

Eleven percent of the distressed homes sold in March were short sales, according to NAR. That's a dip from February, when these transactions accounted for 14 percent of the total number of distressed homes sold. Ideally, more of these homes would be sold as short sales than foreclosures, which would push up the price of homes by limiting the number of cut-rate foreclosures.

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The prices of distressed homes are continuing to drag down the market as a whole. NAR data shows short sales were discounted an average of 16 percent below market value in March. According to RealtyTrac, the average price of a pre-foreclosure sale property nationwide was $184,221 for the fourth quarter of 2011, down 3.45 percent from the previous quarter.

Short sales have yet to surpass sales of bank-owned  homes (known in the industry as real estate-owned, or REO, sales) nationwide. But data from both NAR and RealtyTrac show the gap between the two is closing, with short sales overtaking REOs in select markets. 

Many lenders are starting to prefer selling a home in a short sale, rather than adding it to their REO inventories

What's next?

It's possible the short sale trend will continue as more lenders try to keep REOs off their books. RealtyTrac projects that this year's first quarter will see more than 105,000 short sales. And there may be more to come.

The analytics company reports two pools of potential short sales on the horizon: delinquent loans that have not yet started the foreclosure process and mortgages currently underwater.

According to RealtyTrac, 28 percent of the 45 million outstanding mortgages nationwide are seriously underwater, meaning they owe at least 25 percent more on their mortgage than their home is worth. Whether they're delinquent or not, these homeowners are good short-sale candidates if they choose to sell in the near future (and get approved by lenders) and could contribute to short sale inventory.

Charlie Engel, senior vice president of RealtyTrac, said in a web conference Thursday that he believes lenders are beginning to see short sales as a better alternative to foreclosures for all the parties involved. The willingness of lenders, combined with the recent decline in short sale market times, leads him to believe that we're headed for a "wave of short sales."

Engel also thinks foreclosures will increase over the coming months, as banks become more efficient at processing them. 

It remains to be seen whether short sales will outpace foreclosures, or if that trend will help speed up the recovery. One thing is certain -- the housing market has a long way to go before it is fully healed.

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