Early last week, real estate circles were sent abuzz by the release of the Standard and Poor’s/Case Schiller national home price index, which revealed that average home prices in the nation’s 20 largest markets experienced a 3% jump in valuations during the second quarter.  It marked the first quarterly increase in 3 years for the index, leading some prognosticators to suggest that housing has indeed bottomed out.  In fact, CNBC’s Jim Cramer has panned for some time now that housing is bottoming out.  However, Cramerica & friends could not be more wrong.  Despite this hurried optimism, a variety of factors suggest that the darkest days still loom ahead for the US housing sector.

1.  First, we have that pesky figure called “unemployment.” According to the US Department of Labor, 247,000 people lost their jobs in July.   While that figure may be beginning to taper down when compared to previous months, any realistic hope for positive job growth will likely wait until 2010, at best.  Meanwhile, an extra 200,000 people gave up looking for jobs, most likely as a result of frustration and a lack of hope.  While not an earth-shattering figure, bear in mind that millions of Americans, gainfully employed or otherwise, are still receiving mortgage statements in the mail every month. If the recession lingers on, we are likely to see more and more out-of-work homeowners falling behind on or simply walking away from their mortgages.

2.  The federal housing credit is due to expire. First-time home buyers are currently eligible for up to $8,000 in credits from the federal government to use towards the purchase of a new home.  However, the program ends abruptly on December 1.   Roughly 1/3 of all new home purchasers currently take advantage of the credit; thus, when this government subsidy expires, the housing market may find itself in a pickle. Consumers might ride the wave of buyer momentum and continue to scoop up houses, or, more likely, a considerable pool of price-conscious home buyers will decide to delay or abandon entry into the housing market.

3.  The effects of ARM resets have yet to be fully realized. As this schedule of adjustable rate mortgage resets illustrates, the US should still see a sizeable chunk of recently-originated ARM mortgages reset in the coming two years (Credit Suisse predicts the total amount could reach $1 trillion).  As more and more homeowners see their mortgage payments reset from initial, artificially low teaser rates, the serious threat of foreclosure will remain.  Ben Bernanke & Co. has pledged to do its best to keep interest rates low, which should help to mitigate the extent of upward rate resets.  Nonetheless, the threat of foreclosure could grow considerably for millions of additional ARM holders as their monthly housing payments rise.

4.  Housing inventory data is misleading. Estimates suggest that the US currently has a 6-8 month inventory of homes available for sale, which equates to how long it takes for the average home sitting on the market to sell.  In actuality, that figure is much higher.  Millions of Americans who in rosier times would sell their homes have taken them temporarily off the market, either continuing to live in them or renting them out.  This has created a “shadow” surplus inventory, equating to a surplus backlog of condos and homes. When prices finally do begin to inch back upward, homeowners could very well look to unload their homes en masse, threatening to push prices further south.

5.  Pending budget deficits are forcing local governments to raise taxes. As Californians have been made well aware of, the recent recession has forced state, county, and local governments to reign in on spending as tax revenues have evaporated.  With continued government bailouts less likely, several states and municipalities are considering measures to recoup such losses, including raising taxes on everything from personal income to water usage and public transportation.  This increase in taxation, in the wake of our worst economic struggle since the Great Depression, could easily push even more homeowners beyond their means and out of their homes.

6.  Last, access to consumer credit has tightened considerably. Long gone are the days in which just about any John, Jane, or Alberto could lock in a mortgage with little or no down payment and attractive terms.  In fact, even if interest rates mimic the artificially low rates encouraged by Alan Greenspan earlier in the decade, home buyers must still navigate a much less-forgiving lending environment.  A majority of banks have both reigned in on lending practices and upped their underwriting standards.  These efforts, done in an attempt to both deleverage and build up capital reserves, have been passed directly on to the consumer.  As a result, home buyers are being forced to shell out larger down payments, undergo more stringent proof-of-income terms, and, in contrast to several years ago, convince the banks that they represent a healthy credit risk.  Oh, how  times have changed!

Although home prices have recently flirted with the notion of heading north, a multitude of risks still remain.  Unemployment, the expiration of home buyer subsidies, ARM resets, a bloated housing inventory, a heightened tax environment, and tightened lending standards should place continued downward pressure on the housing market.  While these trends admittedly will not affect all regions of the country equally, they cut to-the-core several of the major themes affecting municipalities across the US.  While the recent upswing in prices represents a welcoming change for homeowners, such a price movement is unsustainable.  Furthermore, the price weighted Case Schiller Index is disproportionately responsive to changes in prices amongst the most expensive homes in each market.  Hence, it is an unreliable indicator of broad market changes in home prices.  Lacking any fundamental changes in the consumer landscape, the media pundits and housing bulls will nonetheless pounce at any opportunity to grab the headlines with their ‘bold’ claims of a turnaround in the greater economy and housing.  However, taking a quick look around the housing landscape, it’s safe to assume that we aren’t out of the woods quite yet.