Today the Federal Housing Finance Administration (FHFA) will release its House Price Index. Last month’s report showed that home prices rose modestly, by 0.8 percent in April for homes sold or guaranteed by Fannie Mae or Freddie Mac.

While a home price increases of less than one percent may not raise market prices to the levels necessary to stabilize the market and return to pre-2008 home values, there are some redeeming forces at play in the housing market. As long as the house price index continues to increase, even by minimal margins, we are likely still headed in the direction of recovery.

Recent research by CoreLogic in its MarketPulse Report suggest that the significant portion of underwater homeowners, or stated differently, properties with negative equity, are actually placing upward pressure on home prices that might otherwise still be declining.  Estimates suggest that between 20 and 30 percent of all homeowners in the U.S. are underwater on the mortgage. 

The research from CoreLogic indicates that these homeowners cannot afford to sell their homes at today’s prices, and are therefore keeping their homes off the market and waiting for increases in home prices.  Keeping these properties out of the housing supply supports higher levels of demand for distressed properties.

This stabilizing factor will likely remain, so long as homeowners are optimistic about the future of the housing market. And recent reports offer positive support for consumer’s confidence in the housing market.

On July 9, Fannie Mae released its June 2012 National Housing Survey results.  The survey reported improved confidence amongst consumers regarding the future housing market including home sales and home prices.

Fannie Mae reported that average home price expectation rose by 0.6 percent from May to June, and thirty-five percent of the individuals surveyed believed that home prices would increase over the next year.

The primary cautionary tale of the housing recovery remains to be consumer confidence.  Further lags in the economy and lackluster employment reports may erode consumer confidence, the emotional currency required to drive demand in the housing market and the entire economy. So long as unemployment figures do not worsen and the housing supply does not increase materially, the housing recovery is likely to maintain its footing.

So while we need to keep a close eye on the recovery of the housing market and consumer confidence and the labor market, we don’t need to fear single-digit, or less than single-digit, increases in home prices. The future still looks bright for home prices, in particular during summer months.