Why Housing is Headed for Second-Half Headaches

Although home sales increased more than expected in April, real estate experts are expressing concern that the market may face renewed downward pressure in the second half of the year.

The National Association of Realtors said Monday that sales of previously owned homes in April rose nearly 8 percent from March and nearly 23 percent from a year earlier. Even more encouraging, the figures showed that the median price of an existing home hit $173,100 in April. That's up 4 percent from April 2009, and "the best price gains since mid 2006," David Resler, the chief economist at Nomura Securities, said in a report.

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The optimistic looking data reflects a number of favorable conditions in today's market. Home prices have fallen precipitously from the peaks reached during the housing boom, helping restore affordability to many markets. Rates on 30-year fixed mortgages remained in an attractive range in April, averaging just above 5 percent for the month. Meanwhile, recent government data suggests that the labor market may finally be recovering from a protracted period of job losses.

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Much of the improvement is rooted in the looming expiration of Uncle Sam's home buyer tax credit, which offers qualified buyers up to $8,000 in incentives as long as they have a sales contract signed by April 30 and close the transaction by the end of June. Since the existing home sales report reflects completed transactions, the data is expected to remain firm in the near term. "The expiration of the homebuyer tax credit likely boosted sales in April, and will continue to do through mid-year, when transactions must be closed to qualify for the homebuyer tax credit," economists at Goldman Sachs said in a report.

Many economists, however, expect sales to slow once the tax credit expires. That's because the credit likely helped pull forward sales that would have taken place in later months, with buyers scrambling to take advantage of the government incentives.

The market's recent price gains could soon reverse course as well. The backlog of unsold homes increased in April, with the months' supply of unsold inventory hitting 8.4, up from 8.1 in March. (These figures are not seasonally adjusted.) Ian Shepherdson, an economist at High Frequency Economics, suggests that the recent improvements in real estate market conditions may have convinced more sellers to list properties. "Overall supply is now rising quite quickly as would-be sellers see a chance to move their [property]," Shepherdson said in a report. "We remain nervous that this wave of supply will push [prices] back down in the second half of the year."

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For his part, Patrick Newport, an economist at IHS Global Insight, says the tax credit's expiration will lead to a "mid-year plunge" in home sales. "Our view is that sales will start growing sustainably as the job market improves."

So while lower prices, cheap mortgage rates, and government tax incentives have created some compelling reasons to jump into the real estate market today, Mike Larson of Weiss Research points to a handful of additional forces working to sandbag a vigorous housing recovery. "The backlog of distressed homes remains extremely high. Uncle Sam is just about the only guy making or backing home loans. And we're certainly not seeing a rip-roaring rebound in the job market," Larson said in a report. "Under those conditions, we can still get an anemic recovery in housing—but it won't be worth breaking out the champagne over."