The latest volatility in housing sales is almost surely a transitory reaction to the April termination of the government’s $8,000 first-time homebuyer’s tax credit. The tax break, however, was never sufficient enough to affect housing fundamentals. Whatever claims Washington may have made for its policy, families hardly seemed likely to incur mortgage debts for $200,000, $300,000, or more just to save $8,000 on their tax liability. But if the credit has had little effect on the fundamentals, it has influenced the timing of people’s purchases.

Once it became apparent that the tax break would end in April, those who were thinking of buying anyway had every reason to accelerate their closing from May or June, for instance, back into April, when they could still secure the credit. Accordingly, housing sales surged in March and April, rising almost 16%; but since many of those closings took from sales that would otherwise have occurred later, succeeding months into July saw a sales decline of almost 34%. Mirroring sales, new residential building activity also gyrated, surging by almost 9.0% into spring and then, after the termination of the tax credit, falling almost 8.5% into July.

But for all these ups and downs in sales and construction, price behavior has consistently spoken loudly to more stable fundamentals. Throughout the months of weakness last spring, the prices of existing homes and condominiums continued to rise, actually accelerating from a 4.4% rate of gain between January and April to a 5.6% rate of gain between April and July (the most recent month for which data are available). Now, as if to confirm the message of pricing, August sales of existing homes picked up, rising 7.6% from July’s low level, and new housing starts nationally rose almost 2% in August, or almost 24% at an annualized rate. It is, of course, always dangerous to rely on one month’s data, but in this context, with other supporting evidence, the focus on a single month may well be appropriate.

If the spring scare was misplaced, however, the future can promise only very slow recovery. Default and delinquency problems remain intense, allowing only the most halting pace of financial healing. To be sure, default gauges have improved. The Mortgage Bankers Association reports a drop in the rate by 45% from a year ago. Lender Processing Services reports about a 5% drop in delinquencies, as well. But even with this undoubted improvement, both defaults and delinquencies, at 4.67% and 9.85%, respectively, remain high by historical standards.

High vacancy rates also point to a slow housing recovery. Homeowner vacancies, at 2.5% in the second quarter (the most recent period for which complete data are available), are modestly better than they were in the first quarter, at 2.6% 2.7% at the end of 2009, and 2.9% in 2008. But they remain much worse than long-term historical averages of 1.5%. Rental vacancy rates, at 10.6% nationally, also have improved from 11.1% a year ago, but similarly remain well above the longer-term historical average of 6.0%.

Even in the best circumstances, it would take a long time to work off these excesses, but it is also clear that the data disguise other constraints. Anecdotal evidence suggests strongly that banks and other mortgage lenders are holding back on foreclosures. No doubt they reason in part that a family in the house, even if they are not paying, is better than hiring security to protect a vacant structure. More, these lenders must fear the market effects of thoroughgoing action on foreclosures, specifically that the rise in houses for sale would glut the market and send prices spiraling downward again. While managing the foreclosure process has helped produce the recent stability, it will prolong it as well, as banks and other lenders gradually feed this “shadow inventory” of homes out for sale and in the process limit the upward move in pricing and new construction.

The upside in this situation lies in the hope that the economic recovery will eventually enable homeowners to resume their obligations, obviating any need for even delayed foreclosures and sales, and allowing the market to improve sooner than it otherwise might. The downside is that lenders will mismanage the “shadow inventory,” foreclose too rapidly, putting too many of these properties out for sale, and precipitating another round of downward pressure on housing markets. On the positive side, the slow speed of general economic recovery limits likelihoods. On the risk side, the success of lenders to date raises the probability of effective management. On balance, then, probabilities point to a very slow housing recovery indeed, one in which moderate sales only gradually reduce vacancy rates and moderate income growth fosters only slow financial healing.

Milton Ezrati, Lord Abbett senior economist and market strategist.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.