Recent data suggest that the worst may be over for the housing markets. As I mentioned in my last Market Commentary, the three major housing measures-existing home sales, new home sales and housing starts are hovering above their cyclical lows posted in January of this year. And home values are currently falling at a slower pace than the pace registered in January. It is possible that the worst may be behind us; but it is another thing to say that the housing markets are on the road to recovery.

A housing recovery is not defined as a rebound in home sales when home values are declining and foreclosures are mounting. A large percentage of home sales are foreclosures which do not necessarily reflect a healthy marketplace. Just look at the West region of the United States which is dominated by the high foreclosure states of California, Nevada and Arizona. Existing home sales in the West surged 24 percent in the first quarter of this year compared to a year ago. One would think that the West was firmly on a recovery path. But a majority of those home sales were foreclosures while home values dropped by 20 percent in the region during the same time period; hardly a recipe for a recovery.

To be fair, previous real estate downturns and recoveries have been defined solely by falling and rising home sales and residential construction. This is because home values held steady or modestly increased during those downturns. But with property values surging during the real estate boom and tumbling during the real estate bust, today’s real estate markets resemble the bull and bear cycle of the stock market, characterized by increasing and falling equity values. In the equities market, the volume of equity transactions is an afterthought.

I would argue that in today’s residential real estate markets, both quantity and quality matter. An increase in home sales and residential construction is a welcomed expansion of housing activity, creating jobs, homes, and business profits/revenue. However, like the stock market, a decrease in home values reduces household wealth and household spending. A rebound in home sales/construction and home prices are both necessary ingredients for today’s housing sector to be firmly on the road to recovery.

Unfortunately, a full housing recovery is not yet in sight. Over twenty percent of homeowners are underwater (i.e., their loan balances exceed the value of their homes) and as home values continue to fall, that percentage may get worse. An oversupply of homes in the housing sector combined with a steady dose of foreclosure sales exerts further downward pressure on home values.

Looking forward, I expect home sales numbers to scrape bottom and slightly drift upward over the next several quarters. However, home prices, as measured by the Case-Shiller home price index, are likely to drop further during this same time period for reasons stated above. Only when home values stabilize, will we have a true recovery in the housing markets.