On the positive side, corporate profits are up strongly, while labor costs are falling. And fiscal and monetary policy continues to be accommodative, ready to support economic activity.

In recent months, housing activity weakened despite the presence of the homebuyer tax credit and historic low mortgage rates. Existing home sales tumbled 22 percent since November of last year. Similarly, new home sales decreased 14 percent since November. Consequently, the months’ supply for both existing and new homes rose to 7.8 months for existing homes and 9.1 months for new homes.

Two major leading indicators of housing activity-pending home sales and mortgage applications to purchase homes tell us that it will get worse before it gets better. The National Association of Realtors’ pending home sales index has fallen 20 percent since October, while the purchase application index has dropped 7 percent over the past month. Both indicators are reliable predictors of home sales, suggesting that March and April home sales reports are likely to post relatively weak numbers.

On the price front, The Case-Shiller 20-city home price index fell by only 0.24 percent in December from a month earlier, but fell 3.1 percent from a year ago. The Case-Shiller 20-city index has now dropped by 28.8 percent since the index peaked in May 2006.

Looking forward, expect downward pressure on home values, as measured by the Case-Shiller index, due to mounting foreclosures, supply imbalances and relatively weak housing demand. The Mortgage Bankers Association’s mortgage delinquency survey revealed that the 90-day past due category rose to a record level in the fourth quarter of last year, while the 30-day past due category fell from a quarter earlier. An unusually high number of delinquent loans in the 90-day past due category is sure to translate into more foreclosure filings this year. In addition, there is widespread speculation that banks are hoarding underwater/delinquent loans that are ripe for a foreclosure filing. This “shadow” inventory is estimated to be well north of 1.5 million properties. In fact, some estimates place the nation’s shadow inventory closer to 7 million homes.  The potential for a substantial increase in foreclosure filings due to shadow inventory does not portend favorably for home price stabilization. On a positive note, the drop in the number of mortgage loans in the 30-day past due category suggest a drop-off in foreclosure filings sometime into the not-to-distance future.

The housing outlook is mixed for the remainder of 2010. Mortgage rates are expected to drift slightly upwards due to the winding down of the Federal Reserve’s mortgage security purchase program. Home sales and new residential construction activity are expected to fall in the first half of the year, before rising again, albeit modestly, in the second half. Distressed sales (foreclosures and short sales) are expected to flood the market throughout the year, exerting downward pressure on home values during the first half of the year, while home values are expected to stabilize and maybe rebound in the second half of the year due to a rebounding economy and job creation that will likely occur in the second half of the year.

The February 2010 Mortgage Monitor report, released by Lender Processing Services, Inc. shows that while delinquency rates in the U.S. have risen to historic highs, the pace of deterioration has slowed. However, the nation’s housing market remains far from a full recovery.

 Based on data extrapolated from the LPS servicing database, nearly 7.5 million loans are in some stage of delinquency or foreclosure, with an additional one million properties in REO or post-sale foreclosure. In addition, approximately 2.5 million loans that were current on Jan. 1, 2009, were 60 or more days delinquent (including foreclosures) as of Jan. 31, 2010.

 Despite extraordinary loss mitigation efforts that have resulted in the execution of approximately two million loan modifications - including the federal government’s Home Affordable Modification Program (HAMP) trial periods - the number of new delinquencies since January 1, 2009, still exceeds this number by 25 percent.

 The nation’s pool of problem loans continues to grow and stagnate. More than 31 percent of loans that have been delinquent for six months are not yet in foreclosure, while 22.8 percent of loans delinquent for 12 months have not been moved to foreclosure status (up from 9.0 percent in 2008).

Older loans now make up a higher proportion of new delinquencies, as more loans experience repeat delinquencies. The average loan age of newly delinquent loans is now 46 months, as compared to an average newly delinquent loan age of 27 months in January 2007. During January 2010, 346,000 borrowers became delinquent for the first time, representing approximately 40 percent of all newly delinquent loans for the month.

Other key results from LPS’ January 2010 Mortgage Monitor include:

 Total U.S. loan delinquency rate:         10.2 percent

 Total U.S. foreclosure inventory rate:    3.3 percent

 Total U.S. non-current loan rate:         13.5 percent

 States with most non-current loans: Florida, Nevada, Mississippi, Arizona, Georgia, California, Indiana, Illinois, Michigan and Ohio

 States with fewest non-current loans:     North Dakota, South Dakota, Alaska, Wyoming, Montana, Nebraska, Vermont, Colorado, Oregon and Wa

Mortgage applications rose last week for the second week in a row, led by an increase in purchases that may be another indication the homebuyer tax credit is starting to invigorate demand.   The Mortgage Bankers Association’s index increased 0.5 percent in the week ended March 5. The MBA said purchases climbed 5.7 percent, while refinancings fell 1.5 percent.

However, field reports confirm that move-up buyers are evidencing little interest in the $6500 credit, which is worth about two percent of the average purchase price for current homeowners who want to buy a new home.  The amount is apparently not large enough to create much of an incentive for many homeowners who are handcuffed by negative equity or who don’t believe they can sell their homes in the current market.

In Charlotte, North Carolina the market is picking up, thanks in large part to the looming deadline for receiving first-time home-buyer tax incentives. Local realtors say more people are buying homes, taking advantage of lower-than-usual interest rates and the credit.

“Financially, I don’t even know if I’d be able to do it without that, so yeah, it’s definitely the reason I’m buying,” a first-time buyer told the Charlotte News-Observer. 

In February, 49 more homes closed compared to February 2009. “We’re up 14 percent in pending sales from the previous year, so that’s a real strong indicator of what’s happening,” said Lyn Kessie, the president of the Charlotte Regional Realtor Association.

Sales were also up last month in the Des Moines, Iowa metro area.  More contracts were let in .ny February since 2006. February pending home sales were 25 percent higher than a year earlier and 33 percent higher than in January. February’s closed sales rose 3.4 percent over a year ago and 18 percent over January sales.

“I think we’re over the worst of the housing market downturn,” said Joanne Mangold, president of the Des Moines Area Association of Realtors, told the Des Moines Register. “We suffered with the rest of the nation … but I think the tax credit momentum will help carry us into a more normal summer and fall markets.”

Home sales in Lafayette, La. remain flat, but real estate agents are confident the market will heat up during the spring and summer months.

While homes aren’t selling as fast as they did from 2005-07, Lafayette hasn’t experienced the same drop in values as other markets.

“We’re stable,” said Jim Keaty, broker of Keaty Real Estate in Lafayette. “We’ve still got lots of people coming into the market, and we’ve got a lot of people moving up.”

In Covington County, Ky. home sales were up more than $1.1 million in February when compared to the same period in 2009 - a sign local Realtors say is “encouraging.”

“So far this year we’ve sold nearly $3.5 million in residential sales, compared to $2.39 million this time last year,” said Tripp Bass of the Bass Agency.

According to Bass and Covington Association of Realtors president Debra Donaldson, the majority of local Realtors are seeing more activity in the housing market - a fact they attributed to two things.

“February and March have seen most of the transactions, and some of that could be from people getting their tax refunds,” Donaldson said. “We are also seeing a lot of people who are wanting to buy before the April 30 deadline (to take advantage the homebuyer.

In Redlands, Calif., Local home sales are holding steady, and some Realtors say there is more business because of the new homebuyer tax credit.  

“We’re seeing a lot more activity - sales are picking up,” said Carol Meulenkamp, broker-owner of The Real Estate Group on West State Street.

“Of course, the main sales are in the lower end, but a lot of buyers are looking to take advantage of the tax credit at this time,” she said.

Century 21 Lois Lauer agent Shirley Harry said agents have not seen the rush they thought they would, but sales have been consistent except two years ago, “when we all died.”

“It’s picked up nicely,” she said. “It’s not going leaps and bounds and we’re glad about that because that makes things unaffordable for most people. But it’s nicely inching up.”

“The outlook is for steady improvement,” said Dave Coy, president of Redlands-based Century 21 Lois Lauer. “I can’t put my finger on it, but we’re starting to see things loosen up a little.”

Greater Nashville, Tenn. saw an increase in home sales in February, according to the Greater Nashville Association of Realtors, the fifth consecutive month of year-over-year increases. There were 1,614 sales pending at the end of the month, compared with 1,452 pending sales a year ago. Inventory ended slightly up, at 23,159, compared to 23,122 in February 2009.

 ”With median residential prices virtually the same as last year, median condo price down slightly and interest rates still remarkably low, the overall market remains stable with some cause for optimism as people take advantage of these conditions,” said GNAR President Lucy Smith. “It was expected that the market would stabilize after the significant increases in closings at the end of 2009 due to the tax credit deadline. But, with the next deadline at the end of April, it is reasonable to think that we could see another burst of activity in spring and early summer.”

North Texas is one of the few areas reporting a drop in sales.  They fell 5 percent in January and February, the third month in a row that sales by area real estate agents were down from a year ago.

“If we don’t see significant pickup starting in March, then the credit likely isn’t going to have much impact on the housing market at all, and overall recovery will be slower and dependent on general economic improvement,” said Dr. James Gaines, an economist at the Real Estate Center at Texas A&M. “If this situation exists and the sales numbers continue to slide from last year, we’re in for a very difficult year.”

Gaines said he hopes to see the first results of the expanded homebuyer tax credit show up in this month’s sales figures. The federal program provides up to an $8,000 tax credit for first-time buyers and as much as $6,500 for other purchasers who qualify.

“If the credit helps at all, the percentage increases should look pretty good as they will be compared to the same months last year, which typically were not very good,” he told the Dallas Morning News.

Contra Costa, Calif. Is seeking sales pitck up and the credit was one of a number of reasons he bought, Taylor Heanue, a 34-year-old mechanical engineer, told the Contra Costa Times. “The interest rates being low played a big part in our decision as well. Another factor is the housing market. It’s a good time because of the prices,” he said.

“One of the reasons the first-time buyer credit is so appealing is that people are not wiped out of their savings,” said David Kerr, a Realtor with Zip Realty who helped the Heanues find their home.

As far as the repeat-buyer credit, Kerr has not seen many people use it. For it to be practical, someone has to either have substantial equity in their existing home or substantial savings on hand to help swing the loan on the replacement home, he said

“What I’m seeing is that the (tax credit) is not a make-it or break-it for people,” said another Realtor. “Nobody in my pool of preapproved buyers is basing a home purchase solely on the tax credit, but every single one of them knows about it and is very motivated by it.”

In Rutherford County, Arkansas they take housing seriously.  Local community leaders have banded together to try to jumpstart the housing industry with the SmartMove Campaign.

“We’ve lost thousands of jobs in the homebuilding and construction industries since the recession began,” said Bill Jones, Chair of Destination Rutherford, a program of the Rutherford County Chamber of Commerce focused on economic development.

The Chamber and Destination Rutherford, in partnership with the Middle Tennessee Association of Realtors and Rutherford County Homebuilders Association, launched SmartMove today.

“The purpose of the campaign is to stimulate and remind those who are thinking about buying their first home or moving up into a new home to act now, especially while unprecedented tax credit programs are still available to ease their way into a new house,” Jones said.

The SmartMove program will culminate April 10 and 11 with a SmartMove Homes Weekend event, featuring consumer education seminars on many aspects of how to buy a home, a trade show and open houses at homes for sale.

The SmartMove program will use advertising and publicity to provide information about not only the federal Homebuyer Tax Credit Program but also additional loan programs that are available to homebuyers, including loan programs from the City of Murfreesboro, the Tennessee Housing Development Agency, the United States Department of Agriculture Rural Development and others.

Foreclosure notices fell 2 percent last month and were only 6 percent higher than they were in February 2009, the smallest annual increase since January 2006, according to RealtyTrac.

Last month, when the Mortgage Bankers Association’s National Delinquency Survey found that in the fourth quarter of 2009 the delinquency rate on residential properties fell 17 basis points from the third quarter of 2009 MBA’s Chief Economist Jay Brinkmann made news with his optimism.

“We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” he said.

Today James J. Saccacio, chief executive officer of RealtyTrac, was less sanguine.

“This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity - albeit at a historically high level that will likely continue for an extended period,” said Saccacio.

Metro areas in the Sun Belt states of Nevada, Florida, California and Arizona continued to dominate the top 10 highest foreclosure rates among metropolitan areas with a population of 200,000 or more, but activity trends in these areas varied considerably.

The Las Vegas metro area documented the highest metro foreclosure rate, with one in every 90 housing units receiving a foreclosure filing during the month, despite a 9 percent decrease in foreclosure activity from the previous month.

Six of the other metro areas in the top 10 - all in California or Arizona - also reported decreasing foreclosure activity from the previous month. The biggest monthly decrease among the top 10 was in the Phoenix metro area, where foreclosure activity dropped nearly 18 percent.

In contrast, the two Florida metro areas in the top 10 both posted substantial monthly increases in foreclosure activity. The Cape Coral-Fort Myers metro area saw a 31 percent increase in foreclosure activity from the previous month, giving it the second highest metro foreclosure rate - one in every 92 housing units receiving a foreclosure filing. An increase of nearly 66 percent in foreclosure activity from the previous month helped boost the foreclosure rate in Port St. Lucie to sixth highest.

Persistent rumors that “a wave of new properties is headed toward the market, one that is expected to prolong the housing downturn and might even cause prices to dip again” as reported in a lengthy story in the Sonoma County Press Democrat Saturday remain only rumors.

Analysts at RealtyTrac and elsewhere have estimated that there is a “shadow inventory” of 1.7 million to 7 million homes in foreclosure that lenders haven’t yet put up for sale. To put that number in perspective the annualized rate for existing home sales in January was 5.05 million units.  The rumored shadow would equal between 30 and 140 percent of the entire year’s sales.

Nationally, there’s no sign of a shadow inventory coming on market.  ZipRealty’s monthly report on inventories found that the supply of homes available for sale in 27 major metropolitan areas at the end of February was down about 19 percent from a year ago. 

On a national basis, inventories typically rise in February from the January level as owners put their houses on the market in anticipation of the busy spring home-shopping season.  This year was no exception as inventories were up 4.2 percent from January as sellers hope for an earlier and busier than usual spring season with the tax credit extended through April.

Total housing inventory at the end of January fell 0.5 percent to 3.27 million existing homes available for sale, which represents a 7.8-month supply at the current sales pace, up from a 7.2-month supply in December. Raw unsold inventory is 9.6 percent below a year ago, and is at the lowest level since March 2006, according to the National Association of Realtors.

In California, site of most of the shadow sightings, inventories of unsold homes are down 20.5 percent from a year ago.  Through January 10, the months’ supply was a healthy 5.8 months, according to the California Association of Realtors.  Prices in California are up 15 percent over 2009.

As record snows melt away in the Midwest and East, real estate professionals are not seeing the volume of interest or which they had hoped. Despite the expansion and extension of the Federal tax credit, low mortgage rates, robust inventories, and prices as low as they have been in years, expectations are low as the real estate industry enters the 2010 home buyer season.

Like a skunk at a picnic, the January existing sales and pending sales reports from the National Association of Realtors surprised many and drastically lowered expectations for the spring. Existing sales fell after several months of tax credit fervor in the fall. Based on contracts signed in January, pending sales fell 7.6 percent to 90.4 from an upwardly revised 97.8 in December, but remains 12.3 percent higher than January 2009 when it was 80.5.

Reports from across the country are markedly low key as we enter the middle days of March, a time when traditionally the spring sales season is well underway. 

In Las Vegas, contracts on listings are up 845 units over January, not a huge number for that market. New listings are down 213 units and closings are down 987 units. Much of the pending inventory is short sales which require LONGER close times. December's sales were unusually high and January's numbers are still higher than last January. 

In west Georgia, the tax credit boosted sales last year, as in most places, but now fears are growing the market will retrench. 

"It has had a very good effect on the market, but I have a feeling the market may do what the automobile market did after the Cash for Clunkers program went away," said Dwayne Hicks, a broker with United Country West Georgia Realty in Carrollton. "The market does not have enough legs on it yet to stand, and I think the biggest thing right now is nobody has ever seen a jobless recovery and it's a little bit tough to see a rebound taking hold if people can't buy anything, certainly not a home or a car, because they're concerned about their job."
In New York's Hudson Valley, sales and price figures across the region are down dramatically. February was the slowest month for home sales that Orange County has seen in years, and Sullivan County didn't fare much better. The frigid market is a function of the general economic malaise, combined with the biggest blizzard in years.
"The weather just knocked out a ton of closings," said Joseph Rand, managing partner of Better Homes and Gardens Rand Realty.
Rand added that, following last fall's tax-incentive-fueled rally, the real-estate market has been going through a lull for the past two months. "We're expecting that to change in March and April," Rand said.

In her annual housing analysis, Diane Swonk, chief economist of Mesirow Financial, also expects the tax credit to have a greater impact this spring than is evident so far.

"The hope is that the tax credit gets us over the hump and into a more favorable environment on employment. Existing sales are expected to outperform new sales, mostly because of the deals available in the existing market. We should also see some return of luxury sales, as wealthier buyers start looking for deals."

But she doesn't hold high hopes for a year as a whole.

"[T]he level of activity that we see in the market is expected to remain near historic lows and more consistent with a recession (depression?) than recovery. Indeed, nobody in the housing industry is forecasting anything close to what would be considered a 'normal' level of activity until 2012," writes Swonk.

Existing home sales fell 16.7 percent to 5.45 million annualized units in January, while new home sales fell 11 percent to an annualized 309,000 units for the month. The pace of new home sales in January is at the lowest pace on record. As a result, the months’ supply rose to 9.1 for new homes and 7.2 for existing homes.

And according to two leading indicators-mortgage applications and pending home sales, housing activity will get worse before it gets better. Mortgage applications to purchase homes are now at the lowest level, as measured by the purchase index, since 1997. The pending home sales index fell 7.6 percent in January from December, and is now at the lowest level since March of last year.

Both leading indicators suggest the housing correction is far from over. Pending home sales are contracts to purchase existing homes and usually lead existing home sales which are closings by one to two months. Thus, expect a relatively weak pace of existing home sales throughout the first quarter. To make matters worse, the National Association of Realtors noted that abnormal winter weather is likely to have depressed pending home sales further in February. So the actual home sales numbers could end up being worse.

Home values are also sputtering.  Home prices stabilized in early 2009; then edged higher in the second half of the year; and now show signs of weakening. The Case-Shiller Home Price Index for 20 Cities rose by only 0.3 percent in December from a month earlier and is down 3.1 percent compared to a year ago. The Federal Housing Finance Agency’s (FHFA) home price index fell 1.6 percent in December. Despite home values weakening, the level of home prices across the nation appears to be in line with rents and household income, suggesting that home values are now affordable. Indeed, the National Association of Realtors’ affordability index is at an all-time record high. So why are home values weakening again?

The answer is due primarily to excess supply of properties for sale. As long has there are imbalances in the supply of homes across much of this nation, home values are not likely to stabilize. Moreover, rising foreclosures are adding to the inventory of homes, exerting further downward pressure on home values. Economics 101 tells us that home prices will not be in balance until excess supply vanishes.

Surprisingly, the recent retreat in housing activity has occurred against a backdrop of multiple government housing subsidies, designed to spur housing demand. The Federal Reserve’s mortgage security purchase program has kept thirty-year mortgage rates hovering near historic lows. Similarly, two of the largest housing subsidies-Fannie Mae and Freddie Mac (under government conservatorship) continue to feed money into the mortgage market, exerting downward pressure on mortgage rates. And the home buyer tax credit program continues to entice households to purchase homes.

Looking forward, the economy is not helping the housing recovery. Economic growth remains relatively weak and is not strong enough to create jobs. Job losses represent the greatest obstacle to a full housing recovery. The most likely scenario has home sales retreating in the first quarter; but due primarily to the extended and expanded homebuyer tax credit combined with an expected rebound in the job market, home sales are expected to modestly climb during the remaining 3 quarters of the year. As a result, excess inventories should shrink a bit throughout the second half of the year. Softening inventories are expected to ease downward pressure on home values. I expect home prices to stabilize sometime at the end of 2010 or the beginning of 2011.

And if this scenario does not play out, I will have to find another scenario.

The UFA Default Risk Index for the first quarter of 2010 fell to 158 from last quarter’s revised 164, and has now fallen by more than half from the peak level of 330 set in 2007.

Despite the index’s recent steep decline, the risk of default for the current vintage of mortgages remains elevated. The rate of house price depreciation has decelerated, and the hardest-hit areas have begun to return to sustainable levels.  Slower house price depreciation will mitigate risks for mortgage lenders. The Index illustrates the important role that local economic conditions, such as house prices, have played in this credit cycle since loan, borrower and collateral characteristics are held constant over time in the Index.

“Although UFA forecasts that house prices will continue to decline, the rate of decline has decelerated. The hardest-hit areas have begun to return to sustainable levels,” said Dennis Capozza, who is the Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Slower house price depreciation will mitigate risk levels for mortgage lenders.”

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years

 Sales to existing homeowners also have increased from October to January, and last month their market share overtook first-time buyers, 41.2 percent to 39.8 percent.

 With increased supply of distressed properties and decreased demand from first-time homebuyers, average prices declined for damaged REO and even for non-distressed properties in January.

 Both investors and first-time buyers tend to compete at the lower end of local housing markets and the Campbell survey found that first-time buyers are fading even the inventory of distressed properties (REOs, short sales, auction sales) increased from November through January.  Short sales were the fastest growing category of distressed property types in December and January, increasing to 15.9 percent of all sales.  Throughout 2009, they were generally only a tenth of all sales.

The national inventory of existing homes is larger now than it has been since the run-up of sales since thousands of first-time buyers rushed to the closing table last fall to qualify for the $8,000 tax credit, according to the January existing homes sales report released today by the National Association of Realtors.

Some 3,265.000 existing homes are now on the market, a 7.8 months supply.  The national inventory increased 8.3 percent in January.  The months supply has not been as high since September. 

Existing-home sales dropped 7.2 percent to a seasonally adjusted annual rate of 5.05 million units in January from a revised 5.44 million sales in December.

For single family homes, the boost in inventory is more pronounced.  Two point eight million single family homes are listed for sale, a 10.1 percent increase over December.  Single family home inventories are also higher than they have been since September.

The increase in inventory is a concern because the holidays are traditionally a slow time for home sales and many owners wait until January or February before listing their homes.  They are hoping for strong demand early this year in light of the April 30 deadline for the tax credit, which was extended by Congress in November.   Sellers are hoping the credit will give demand a boost and kick off the spring home buying season as buyers rush to get a contract on a home by the deadline.

A surge of December foreclosures also contributed to the rise in inventory.  January REO activity nationwide was down 5 percent from the previous month; and scheduled foreclosure auctions were down 11 percent from the previous month, according to RealtyTrac, but December saw a huge jump in foreclosures coming on market.

“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity  followed by a 10 percent drop in January,” said James J. Saccacio, chief  executive officer of RealtyTrac.  “If  history repeats itself we will see a surge in the numbers over the next few  months as lenders foreclose on delinquent loans where neither the existing loan  modification programs or the new short sale and deed-in-lieu of foreclosure  alternatives works.”