RealEstateEconomyWatch.com

The U.S. housing sector is struggling to gain upward momentum. As has been the case since the homebuyer housing tax credit was removed last June, monthly gains in home sales are followed by monthly drops in home sales; a step forward followed by a step backward.

All three major housing measures-existing home sales, new home sales and housing starts- are exhibiting growing pains. Existing home sales fell by 9.6 percent in February, wiping out half of the slight gains that home sales made in the previous few months. The annualized pace for existing home sales in February stood at an anemic 4.88 million units.

Similarly, the demand for new homes remains alarmingly weak. New home sales fell in February to 250,000 annualized units, a decline of 16.9 percent from January. A meaningful part of this drop is likely due to harsh winter weather conditions throughout a large part of the country which discouraged home shopping. Nevertheless, new home sales averaged a depressing 286,000 annualized units over the last six months.

To make matters worse, new residential construction activity is not faring well. Housing starts plummeted 22.5 percent in February to an annualized pace of 479,000. A large chunk of this drop is attributed to multifamily starts, but single-family starts also fell by a solid 11.8 percent.

Indications from leading indicators for housing activity suggest the nation’s housing sector will continue to struggle in the coming months. Housing permits fell 8.2 percent in February from a month earlier, which means home builders will be digging fewer holes in the ground in early spring. The National Association of Realtors’ pending home sales index rose 2.1 percent in February compared to a month earlier but this gain only reversed part of the large decline experienced in January. The pending home sales index remains below its 2010 year-end level. So don’t expect a meaningful rebound in existing home sales anytime soon.

The Mortgage Bankers Association’s index of mortgage applications to purchase homes was down 4.7 percent in the week ending April 8. The purchase index is now 191.7 and has hovered below 200 throughout most of the year. Historically, a purchase index below 230 indicates weak home sales in the coming months.

Fortunately, the economic recovery shows signs of strengthening which could eventually provide a boost to a struggling housing sector. The labor market experienced two consecutive months of solid growth. Non-farm payrolls rose 216,000 in March after rising by 194,000 in February. The job sector is picking up momentum despite higher oil prices and worries about the Japanese and European economies. Many economic forecasts expect payroll employment gains to average at least 200,000 per month throughout the remaining months of this year. This pace should boost household confidence and consumer spending slightly. Any improvement in confidence and/or a household’s financial situation provides needed support for housing demand. Looking forward, the outlook is for continued gains in the economy, led by a stronger labor market.

Although the economy promises to provide support for the housing sector, many challenges remain before the housing markets enter full recovery mode.

There is reason to believe that recent slowing in the housing indicators is temporary. The combination of a growing labor force and high housing affordability offers solid support for future home buying.  In addition, restrictive mortgage credit conditions are expected to slightly loosen as the year wears on.

On the negative side, home prices are expected to drop further before stabilizing by the end of the year. This is due to a large number of foreclosures in the pipeline of banks. A meaningful number of distressed home sales are expected throughout the year, depressing home values. Further, many household balance sheets are plagued by negative home equity, making it difficult for these households to purchase big ticket items like automobiles and homes.

On balance, I expect home sales to gain momentum as we head towards the summer months. But truth be told, it is difficult to concoct a rosy scenario for the housing sector until downward pressure on home values subsides which will not likely occur until 2012.