BOSTON (Dow Jones) -- This week's stock market rally lifted long-suffering financial shares and home-builder stocks and was seen as a heartening sign for the battered housing market, although economists say it's only the first, uneasy step toward restoring confidence and an eventual turnaround.
A recovery may still be years away, and several other key factors need to come together before housing prices can stabilize and begin to mend. Interviews with housing and financial analysts revealed several signs that savvy investors might want to look for that would set the stage for a housing recovery.
First, financials stocks such as banks and lenders, as well as other housing sectors such as home builders, need to flatten and rebound.
"The sentiment is so negative," said Mark Vitner, senior economist at Wachovia Corp. (WB) . "The housing industry isn't going to get better until financial services improve, and there's just too many homes out there in inventory."
The economist said if construction pulls back the next two years as expected, housing supply and demand should get back in balance by the tail end of 2009, considering the glut of unsold homes currently on the market.
Another requirement is that spreads on bond yields need to come down, giving investors a better sense of safety, while the commercial real estate market has to avoid major setbacks. A plan to freeze rates on subprime adjustable-rate mortgages, if it moves ahead, would help quell fears of a surge in home foreclosures, experts said.
The projections for the credit and mortgage markets must brighten, and consumer confidence has to revive. Homebuyers need to come out this spring, but all bets are off if the economy slides into a recession. Finally, more rate cuts by the Federal Reserve in coming months would also improve the outlook, as would consolidation in the home-builder sector or foreign investors putting more money into banking and housing stocks.
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