If you look at recent headlines such as CNNMoney.com’s “Another Sign of a Housing Thaw” you may be inclined to believe that the housing market has finally found a bottom. Various reports cite increases in sales, slight increases in sales prices, and reduced inventory. These are the three factors needed for any housing recovery to begin. Throw in the first-time homebuyer tax credit, and we may have a winning formula.

But there are some overlooked problems with this belief. The first is that while monthly sales of existing homes have improved, on a seasonally-adjusted basis, we are still worse off than we were last year in all regions but the west. Here’s some data from the National Association of Realtors:

The next problem we face is that inventory levels are still quite high. We are down from the peak of 11 months of backed up inventory, during parts of 2008. But today’s inventory level of 9.4 months is about to get a lot worse. Here’s why: Banks are sitting on their REOs (real estate owned a.k.a foreclosures) and are not re-listing many of these properties. Banks may be doing this for a number of reasons. Foremost is that they do not want to flood the market and drive down prices even further. But how long they will hold on to this “shadow inventory” before slowly releasing them on the market? That is anyone’s guess, but there is no doubt that there is a significant backlog of properties that will eventually hit the market.

The final blow to any hopes of a housing recovery are mounting foreclosures. The Obama administration’s “Making Homes Affordable” program has had abysmal results. Bank of America (NYSE:BAC) has modified 4 percent of its eligible loans. Wells Fargo (NYSE:WFC) has modified 6 percent. There is mounting evidence that lenders are simply unwilling to modify most loans since most modified loans end up right back in foreclosure after a few months. According to Renae Merle at the Washington Post, “The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can’t sustain payments without it yet will be able to keep up with new, more modest terms.”

The other two types of distressed borrowers are those that will inevitable become delinquent again or those that can find a way to become current on their loan with a little coaxing. Banks have little incentive or desire to assist these two types of borrowers.

The housing market still has some serious challenges ahead. Sure, we may see a small increase in prices here or there, but long term, the fundamentals are still garbage. I am not saying that you shouldn’t buy a home right now, either as an investment or as a primary residence. There are screaming buys out there right now, and long term, real estate is still a great buy. Just don’t expect to be able to buy a property today and flip it for a huge profit in the next twelve months. You may see a small decline in your property value, but the huge drops seem to be behind us. We will still face a very long recovery period. But as Samuel Clemens said, “Buy land, they’ve stopped making it.”

Respectfully,

Christian Hill

Source: Don’t Believe What You Hear About a Housing Recovery