The Wall Street Journal

So, is our long national nightmare over? Has the housing market finally hit bottom?

There has been some muted — albeit exhausted — cheering from homeowners in recent weeks. But before we break out the champagne, look out for further potential problems just down the road.

The good news? According to the closely watched Case-Shiller Home Price Index, which tracks home prices across 20 major cities nationwide, the three-year housing slump slowed sharply in April and May.

May’s decline was just 0.2%, the slowest in two years. And several cities actually saw prices rise — among them Denver, Washington, D.C., Chicago, Boston, Cleveland and Dallas.

Even Miami only fell about 1% in May. That’s a great month down there. Previously, prices had been falling 3% a month.

We’ll get an even better picture of the situation when the Case-Shiller figures for June are released on Aug. 25.

But these data aren’t the only hopeful signs.

Inventories of unsold homes have come down. According to the National Association of Realtors, there were about 3.8 million unsold homes on the market at the end of June. That’s down a long way from 4.5 million a year ago.

And yes, housing affordability is dramatically better. People, obviously, need to live somewhere. At some point, housing gets cheap enough that the fundamentals start to look good.

The average home is about a third cheaper than it was at the peak three years ago, a plunge unprecedented since the Great Depression. In the hardest-hit places, such as Phoenix, Las Vegas and Miami, average prices have been halved or better from their bubble peaks.

Cheap Mortgages, Too

Factor in falling mortgage rates as well, and housing starts to look cheap by many measures. Thirty-year mortgage rates, at around 5.5%, are still low by historic standards. A few months ago, when they fell below 5%, they were very cheap.

There’s some other good news for homeowners from the rest of the economy. July’s job losses were better than feared: The unemployment rate, which was heading vertical a few months ago, eased to 9.4% last month from 9.5%.

Some are saying the worst is behind us, for the economy and the housing market. No wonder the iShares Dow Jones U.S. Home Construction exchange-traded fund (ITB), which tracks shares of home-building stocks, has bounced sharply since early July.

So, is that it?

Not so fast.

Prices may — may — be nearing the bottom in many markets. But beyond the headlines, there are plenty of reasons to stay cautious. There may even be fresh dangers just ahead.

And even if prices have stopped falling, it may be years before they start rising sharply again.

First, late spring is traditionally the strongest season in the real-estate market.

And it’s hardly a surprise the market saw some green shoots this time around. It’s enjoying not one, but two, gigantic taxpayer subsidies — an $8,000 refundable tax credit, or gift, for first-time buyers, as well as those cheap mortgage rates. The Federal Reserve has been spending billions of dollars to keep interest rates down.

Both are only short-term fixes. Any sustained economic upturn would be expected to send long-term mortgage rates rising again, dousing the real-estate market with fresh cold water.

Glut of Empty Houses

The picture on inventories isn’t as good as it sounds, either. A lot of unsold homes have simply been put up for rent instead, especially in the most difficult markets like Miami. The result? A glut of empty rentals as well.

New waves of foreclosures and distressed sales may be coming, too. In states such as California, it can take many months for delinquencies to turn to foreclosures, which means last winter’s bad news may still be coming down the pike. Meanwhile, vast tranches of teaser-rate mortgages are due to reset later this year and in 2010.

As for the economy: Both unemployment and household debt levels remain at extremely high levels by the standards of postwar history. Either is bad news for housing. The combination is very bad.

Dean Baker, co-director of the Center for Economic and Policy Research, argued in a recent paper that the fundamentals still aren’t great. It still remains cheaper to rent than to own in many markets, he says.

The biggest bubbles usually produce the deepest busts. And the 2002-2006 bubble was a doozy. The bad news may have ended after three terrible years, but maybe not. Japanese housing prices still haven’t recovered from the late 1980s bubble. Western U.S. markets took six or seven years to recover after the last big bubble burst there in the early 1990s.

Yes, there are some hopeful signs, but don’t let them fool you into thinking it’s all clear. It might not be. As ever, anyone making a major financial decision needs to think more about his or her own situation than what “the market” is doing. A real-estate purchase needs to make sense on its own terms. And measure it on cash flow today, not the hope for capital gains tomorrow. When you factor in all the costs, is the purchase cheaper than renting?

If you get a cheap mortgage and you are aggressive on price, you may get a bargain. That’s especially true if the owner has to sell. Foreclosures and other distressed sales are selling for about 20% below the rest of the market. There are opportunities out there. But you can afford to take your time to shop around.