Home Sales Pick Up at a Halting Pace

Here's a strange situation. The housing market is finally showing signs of life, usually a good indicator of a robust recovery. Yet the market is so fragile that no one's proclaiming the return of a powerhouse property sector.

First, the evidence of a turnaround: The S&P/Case-Shiller index of home prices in 20 cities rose 0.6% in February from a year earlier, the first annual gain since December 2006. A homebuyer tax credit, set to expire Apr. 30, has helped. So has an abundance of inexpensive homes. And the Federal Reserve's recent purchases of mortgage-backed securities pushed the cost of a 30-year fixed-rate mortgage to a new low.

Yet the gain in the Case-Shiller index was half the number forecast by economists in a Bloomberg News survey. Prices declined in 11 of the 20 cities in the index: Las Vegas, down 15%; Tampa, down 6.0%; Seattle, down 5.6%; New York, down 4.1%.

Sales for April will probably increase over March as buyers rush to take advantage of the tax credit. A lasting boost will come only when the employment outlook improves, says Neal Soss, chief economist at Crédit Suisse (CS) in New York. "You've really got to heal the fundamentals," says Soss. "We see housing as a lagging sector for some years into the future."

That's quite a change. Residential construction and home sales led the way out of the previous seven recessions going back to 1960. Don't expect that now, said Federal Reserve Vice-Chairman Donald L. Kohn in an Apr. 8 speech. The improvement in housing is showing up only after two quarters of economic expansion. To add to the pain, "a large overhang of vacant homes is likely to weigh on construction for some time," said Kohn.

The bottom line: Unsold inventory has to clear before the housing market takes off. Millions of foreclosed homes are glutting the market.

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