Distressed sales now make up around two-thirds of transactions in Las Vegas and Miami; even in midwest area, where housing had relatively less drop, 39% of mortgage owners have negative equity (or underwater).  At last, the market for the more expensive houses (500K and above) is simply not moving.  It looks like still too early for housing recovery.  (source: WSJ)

The U.S. housing market was unified by the bust. After peaking in 2006, home prices across the country joined the march downward. Are investors prepared for a return to more normal times?

It wasn't long ago that a nationwide price decline was considered almost impossible by many, not having been observed since the Great Depression. Supply and demand have usually dictated prices on a local level.

And yet, now that there are signs of stabilization, some investors appear to be hoping for prices to recover across the board. Better housing data, such as a rise in the S&P/Case-Shiller index have helped stocks extend a heady rally. A one-time government tax deduction for first time buyers and seasonal demand for homes have added a timely boost.

But a look on a regional level shows a different story. The likes of overbuilt Las Vegas and Miami have yet to see prices turn. There, distressed sales now make up around two-thirds of transactions, according to the National Association of Realtors.

Such distressed sales, mainly foreclosures, are discounted on average 15% to 20%, dragging overall prices lower. Granted, that may set the stage for higher prices when foreclosures slow, but there still is little sign that inventory is near equilibrium.

On the face of it, other parts of the country appear to have better traction. Take the Midwest. Cleveland saw prices rise 10% in the three months through June, the fastest of any location in S&P/Case Shiller's 20-city index.

Midwestern states will likely face some hiccups in any recovery. The NAR reckons the Midwest still has 8.0 months' supply of single-family homes on the market between $100,000 and $250,000, compared with 8.9 months a year ago. During the 1990s, the average nationwide was 6.6 months.

That supply could be tough to clear. The many buyers underwater on existing homes will struggle to move, even to a cheaper home. In Ohio, for instance, some 39% of mortgages have negative equity, or are attached to properties worth less than outstanding debt, according to research firm First American CoreLogic. The national average is 32%.

Demand may stay especially weak for homes in high price categories. The NAR says just 2.5% of the 460,000 homes sold in July cost $500,000 or more. In the fourth quarter of 2004, such homes accounted for 11.2% of the total.

That presents potential for higher average sales prices if more high-end sales are completed. But, with "jumbo" mortgages harder to come by, demand is likely to remain concentrated at lower price levels.

Of course, stability in some housing markets is refreshing. But after the summer house-hunting season ends, the sum of a fragmented market is unlikely to be a unified rise.