Thanks to record low mortgage rates, tax credits, and improving consumer confidence, the annualized volume of existing home sales has increased sharply in 2009, from a trough of 4.5 million units in January to a recent level of 6.1 million units. As a result, existing home inventories have been coming down, but remain about one million units above their 20-year average .

It may be that that the worst is indeed behind us in the housing market, especially since the government seems prepared to do almost anything to prevent any further decline in home prices. However, it would be naïve to characterize the housing market as healthy or normal.

Approximately 14% of homeowners are delinquent on their mortgages or in foreclosure. This is the highest level ever recorded by the Mortgage Bankers Association. Almost a quarter of homeowners owe more on their mortgages than their houses are worth.

In addition, the housing market faces another wave of mortgage distress in 2010 resulting from interest rate resets on “Alt-A” and “Option-ARM” mortgages. This will put upward pressure on the supply of homes on the market, and quite possibly lead to renewed problems in the financial sector and debt markets.

Two additional key risks for the housing outlook are the prospect of higher mortgage rates and a continuing weak job market. If mortgage rates begin to rise from their current record lows levels , which is likely in 2010 as the Fed withdraws its intervention in the mortgagebacked and government bond markets, housing affordability will suffer and housing prices may decline again.

Once tax credit incentives expire, housing demand may wane, especially if the job market does not generate enough traction in the private sector to reduce the unemployment rate.  So one thing is for sure…….were not out of the storm by any means.  We have seen good indicators that the market could shift in a positive direction.  However the economy needs a longer duration of positive swing…….so for now nothing is for certain….. but Uncertainty.

Kevin Lawson