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You Be The Judge: Is The Housing Market Really Improving?

A home for sale in Glenview, Ill. Existing-home sales hit the highest level in more than 3 years in February. But not everyone is convinced that the housing sector's momentum has staying power.
Nam Y. Huh
A home for sale in Glenview, Ill. Existing-home sales hit the highest level in more than 3 years in February. But not everyone is convinced that the housing sector's momentum has staying power.

This week, optimists had no trouble finding fresh evidence to suggest that the housing market is recovering.

On Thursday, they learned from a Realtors' report that existing home sales hit the highest level in more than 3 years. And earlier this week, a Commerce Department report showed homebuilding permits have been rising at the quickest pace since June 2008.

But not everyone is convinced that the sector's momentum has staying power. Skeptics point to reasons why the housing sector might falter, just as it has several times over the past six years.

If the optimists and pessimists had to face off in front of a judge, these are the exhibits they might enter as evidence:

The Optimists' Case

Your honor, don't be blinded by years of bad news. Look at these recent statistics:

— Home prices rose by more than 7 percent last year, according to the widely respected S&P/Case-Shiller Index.

— Builders have been hiring again, adding workers at a pace of 30,000 a month over the past five months.

— The Federal Reserve plans to hold interest rates at historically low levels for a long time, making homes more affordable.

— The number of underwater borrowers, i.e., those whose mortgages exceed the value of their homes, fell by almost 4 million last year to 7 million, according to JPMorgan Securities.

— Sales of existing homes and building permits are both rising. Realtors in a number of cities report bidding wars breaking out because too few homes are on the market. This latest Realtors' report showed sales were 10.2 percent above the same month last year, marking 20 straight months of gains.

-- The Realtors' report showed the inventory of homes for sale in February increased 9.6 percent to 1.94 million. That represented a 4.7-month supply of houses on the market, up from 4.3 months in January. Six months of inventory makes for a healthy market, so Realtors like the direction of that data.

-- Homes are getting bigger again. The median new single-family home shrank about 6 percent during the housing bust. But now, Commerce Department data show the median size of a new home started in 2012 hit a record 2,309 square feet, exceeding the previous high of 2,259 in 2006.

Testifying for the optimists are Federal Reserve policymakers, who on Wednesday released an economic assessment confirming that "the housing sector has strengthened further."

And IHS Global Insight forecasters say they expect 2013 to be the best year for housing since 2007.

The Pessimists' Case

Your honor, we'd like to call your attention to these disturbing facts:

— The number of "underwater" homeowners may be down, but it's still extremely high, with an estimated one in five owing more than the home's worth. When people can't get out of their old mortgages, they can't move up to a nicer home.

— Home prices, on average, are still at very depressed levels — still roughly 30 percent below their peak in many markets. That means millions of houses will remain underwater for a very long time, making it harder for people to trade up.

— Loans may be cheap, but only for people with sterling credit scores. With unemployment still so high at 7.7 percent and wages scarcely growing, millions of Americans can't qualify for home loans.

— Congress has just imposed sharp federal spending cuts, which could depress economic growth and drive unemployment back up, reducing the number of people who could buy homes.

-- The increased number of homes for sale in February may suggest that there really is a "shadow inventory," a huge number of foreclosed houses that lenders are going to begin dumping onto the market now, driving prices back down.

Testifying for the pessimists is Sheila Bair, former head of the Federal Deposit Insurance Corp. At a recent economic conference, she warned that with job and wage growth still so slow, the housing market could soon stumble. "We need more experience and data to know if it's really turned around," she said.

The jury will remain out — at least until the crucial spring season moves into high gear. Late March through Memorial Day is the peak time for home shopping.

For now, even many industry insiders don't seem to know exactly what to think about this housing market. On Monday, the National Association of Home Builders released its latest market index report, and it showed another drop in sentiment.

More builders described industry conditions as bad than good, with the index falling to 44, down from December's post-recession peak of 47. The builders said they were being frustrated by their inability to get credit from their lenders and by rising costs.

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Marilyn Geewax is a contributor to NPR.