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Is Housing Recovering as Much as Everyone Thinks?

The news is finally good: Consumer sentiment in housing is at the highest level since the recovery began.

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Realtors say not only are buyers coming back, but much-needed sellers are too. Inventories of distressed properties are shrinking, and mortgage rates are hitting record lows nearly every week. (Read More: Is Housing Rising From Ashes? 'Industry Has Come Back'.)

The housing crisis is over, right?

"While we have seen many dramatic headlines touting the housing recovery over the last 3.5 years, these headlines and the analysts who author them have been over- predicting changes in the housing market (versus what actually occurred)." said Laurie Goodman of Amherst Securities in a new report.

"Recoveries, with attendant price increases, were anticipated in the spring and summer of 2009, 2010 and 2011; by the fall and winter the predictions of price changes were amended to reflect further price declines. In actuality, after netting out the seasonal factors, home prices have been little changed in the past few years."

Does that mean that we're headed for yet another housing scare come Halloween time? Is housing's winter chill just around the corner? Not according to the bulk of Americans surveyed in yet another new report:

“Consumers are showing increasing faith in the nascent housing recovery,” said Doug Duncan, senior vice president and chief economist of Fannie Mae. “Home price change expectations have remained positive for 11 straight months, and the share expecting home price declines has stabilized at a survey low of only 11 percent."

The expectation is now that home prices will increase an average of 1.5 percent in the next year, according to the survey, and that has sellers coming back to the market. Of those surveyed, 19 percent said now is a good time to sell. That's the highest since the survey began in June 2010. But wait, 19 percent? That's still not a lot.

These national surveys seek overall trends and tout big headlines, but real estate is and always will be local, and this recovery is becoming increasingly local. That is clear in the latest numbers on supplies of distressed homes.

The so-called "shadow inventory" of homes that either have seriously delinquent mortgages, are in the foreclosure process or are bank-owned but not yet listed for sale, fell to 2.3 million units in July according to CoreLogic. That's a 10 percent year-over-year drop, and puts the supply at about six months by the current sales pace.

"The decline in shadow inventory has recently moderated reflecting the lower outflow of distressed sales over the past year," said Mark Fleming, chief economist for CoreLogic. “While a lower outflow of distressed sales helps alleviate downward home price pressure, long foreclosure timelines in some parts of the country causes these pools of shadow inventory to remain in limbo for an extended period of time.”

And that's the problem. In states where a judge is required in the foreclosure process, like New York, Florida and New Jersey, foreclosure timelines are still marked in years, not months. That will keep home prices from recovering as quickly there. Prices could in fact deteriorate. (Read More: Housing Alert: Short Sales may Be in Big Trouble.)

"Market participants have become too accustomed to speaking about a national housing market and national home price appreciation. Going forward, we expect price behavior to vary by price range and location. To over-generalize — we anticipate that the judicial states, those in which a court order is necessary to proceeds with the foreclosure process, will take much longer to clear the distressed inventory than the non-judicial states, and higher-priced homes will take longer to clear than lower priced," noted Goodman.

Much of the latest optimism in housing is due to record low mortgage rates. The Federal Reserve'slatest action to buy $40 billion in agency mortgage-backed securities sent rates plunging and mortgage applications rising.

The applications, however, were largely for refinances, not home purchases. The Fed's move gave more Americans confidence that mortgage rates will not increase in the next year, according to Fannie Mae's survey, but those consumers may be wrong. (Read More: Will Fed's Mortgage Buying Juice the Housing Recovery?)

"More recently, MBS yields have made up nearly all of their initial drop. If sustained, that suggests that mortgage rates may not fall much further, and could even rise," notes Paul Diggle of Capital Economics.

Home buying and selling cannot always be qualified and quantified by monthly economic numbers. It is a highly emotional business, which is why sentiment can not only ignore reality, it can effect reality. Going forward, much of the housing recovery will be driven by sentiment. It remains to be seen if that sentiment will hold if this warming recovery hits a new chill.

—By CNBC's Diana Olick

Sector Watch: US Home Builders

—Toll Brothers

—DR Horton

—Hovnanian Enterprises

—PulteGroup

—Ryland Group

—Lennar Corp

—Beazer Homes USA

—Meritage Homes

—KB Home

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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