Is the Housing Recovery Sustainable?

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Home prices are rebounding, according to the latest data from S&P/Case-Shiller Home Price Indices. But will it last?

The national composite was up 1.2% in the second quarter of 2012 versus the second quarter of 2011, and the 10- and 20-City Composites posted respective annual returns of +0.1% and +0.5% in June 2012.

There were only six cities - Atlanta, Chicago, Las Vegas, Los Angeles, New York and San Diego - where the annual rates of change were still negative. The housing market in Phoenix gained 13.9% and had the best year-over-year performance.

If home prices are going to stage a believable recovery, they'll need more than a few consecutive monthly increases.  

Even with the uptick, national home prices aren't really ahead, but merely back to the same level in early 2003.

  

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Also, don't forget the gains in 2010 were attributable to government tax incentives - not because of a self-healing market. Excluding this aberration, there still haven't been positive year-over-year gains in housing since December 2006.

What about the 10 million mortgages that are underwater? Over-indebted consumers weigh on the broader economy and constrain spending.

National unemployment (U-6 figures) are stuck near 15% and unless joblessness decreases, future gains in the housing market will be limited. 

Interest rates for a fixed 30-year mortgage are still rock bottom and hover around 3.17%. But here too, buyers have been slow to pull the trigger - either waiting for lower property prices or uncertain about taking on the load of a new mortgage.

Housing related ETFs like homebuilders (ITB - News) and apartment REITs (REM - News) have surged by 50.72% and 25.02% year-to-date, respectively.

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