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US Housing Market Shows Improvement

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Major U.S. stock indexes are at their highest levels for the year following the U.S. Federal Reserve's improved economic outlook last week and a national report showing a big bump in home sales. The National Association of Realtors says sales of existing homes surged seven percent in July - the biggest monthly increase in more than ten years.  The good news has helped stoke hopes for an economic recovery. But the picture is not as rosy as it seems.

Sales of existing homes rose sharply in July, surpassing expectations and fueling optimism that the U.S. economy is on the right track. "Affordability is at an all-time high.  You have home prices that have dropped 25 to 30 percent.  You have interest rates at very low amounts and you have consumers who have been waiting to buy.  Combine that with the eight-thousand dollar tax credit you get if you're a first time buyer, and it's creating a solid demand," said Zip Realty's Patrick Lashinsky.

But the higher demand is just part of the larger picture. Although the increase was  the largest in ten years, average homeowners have lost about 15 percent of the value of their homes. 

Economist Mark Zandi says that's symptomatic of a bigger problem in the housing market. "House prices will continue to fall so long as foreclosures continue to mount, so we have to see and hopefully we will see that the president's loan modification plan to forestall the crisis, kicks in," he said.

But critics of the government's plan, aimed at helping struggling homeowners modify loans to make them more affordable, say fewer than ten percent of eligible loans have been changed. 

That means many homeowners  will continue paying high interest rates on loans worth more than their homes. 

Last month, more than 360,000 homeowners were foreclosed, an increase of more than 30 percent since last year. 

Zandi says part of the problem is that banks are still reluctant to lend. "Well, they're nervous, I mean unemployment is rising, house prices are still falling and as long as that continues, they're going to be reluctant to extend out credit," he said.

Realtors say the majority of homeowners who plan to stay in their homes need not worry. "If you are not looking to sell your house, don't get caught up in what the data says.  I think you can be confident it will get back to that price point and it will pass it.  Will it be in a year or two?  Probably not.  Within a five to seven-year horizon, I think that you'll be fine," Lashinsky said.

That's little comfort for an estimated four million homeowners who are struggling to make monthly payments. 

And with unemployment expected to peak next year, the worry is that foreclosures will continue to rise, making prospects for an economic recovery more elusive.

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