Stocks of homebuilders have had an impressive run recently, thanks to a stream of improving macroeconomic data, including home sales and consumer confidence, climbing an average of 38% since March 9. But will the recovery last? Recent gains in long-dated U.S. Treasury yields augur rising mortgage rates, while the likelihood of increasing foreclosures could further bloat the housing supply in the months ahead.

New sales of single-family homes came in at a seasonally adjusted annual rate of 352,000 in April, down 0.3% from a downward-revised 351,000 in March, but 34% below the April 2008 estimate of 533,000, according to the U.S. Census Bureau and the Housing and Urban Development Dept.. But new home sales are down from 362,000 in February. The median sales price of new houses sold was $209,700, down almost 15% from a year ago.

One reason for the month-to-month improvement in the housing numbers for a couple of months earlier this year was the moratorium placed on foreclosures by many banks from November through February, says Robert Stevenson, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller in New York. But since then, foreclosures have continued to rise, causing home sales to plateau.

Some of the positive data points have proved not to be sustainable, he says. "You haven't seen as many sales as you would like coming out of the spring homebuying season and the very low mortgage rates and some of the tax stimulus," he says. Still, homebuilders are feeling more optimistic. The National Association of Home Builders' housing-market index, which measures both current and future sales conditions, climbed two points, to 16, in May after a five-point increase in April.

The "Better Areas" Are Going to Get Hit Economists would like to believe the recent data indicate that the housing market has touched bottom, but prices have further to drop to reach some analysts' peak-to-trough estimates of 43%. John Burns, a real estate consultant who advises major homebuilders, believes the median home price will fall an additional 5% or 6% and that will be the end of it. "The worst areas have been hit very hard" since that's where most of the distressed selling has been, he says. "It's the better areas that are going to get hit over the next 12 months" as foreclosures mount in those areas.

In Phoenix, which has experienced one of the worst drops in home prices from their peak of any U.S. city, sales-office traffic jumped 55% in the three months through the end of April after 11 consecutive quarters of decline, according to Jim Belfiore, president of Belfiore Real Estate Consulting, a market research firm in Phoenix. Traffic is a leading indicator of where home sales are headed, he says.

Builders' sales in that area have at least tripled in the past 30 days, due to a big drop in prices from January through early March that narrowed the premium over prices of foreclosure properties to just 15% in most local sub-markets, says Belfiore. Meanwhile, the latest S&P/Case-Schiller data show prices of foreclosures on Phoenix's multiple listing service up an average of $5 per square foot over the past 30 to 40 days, with demand currently outstripping supply.