The biggest thing holding back the housing market this year in an otherwise happily healthy spring has been inventory – or rather, the lack thereof. Too many homeowners are underwater, owing more than their home is worth, and thus unable to sell.

But recent improvements in the housing market may offer at least a glimmer of light at the end of what has been an awfully long tunnel. With more loan modifications, increased sales and stabilizing prices, local underwater homeowners may be poised to surface in Greater
Boston a bit quicker than expected.

And they were certainly deeply submerged. 

Through the first three months of the year, economists at online real estate giant Zillow.com estimated that 22 percent of homeowners in Greater Boston were underwater. The median underwater homeowner owed roughly $85,000 more than their house was worth. That’s a huge sum when one considers the median Boston-area home price is roughly $300,000.

But that was before a robust spring market helped stabilize prices, as sales spiked and reports of multiple bids started coming in from across the commonwealth. Home sales in the Bay State increased almost 35 percent in May – the highest year-over-year monthly since the expiration of homebuyer tax credits in 2010, according to data obtained from The Warren Group, publisher of Banker & Tradesman. Year-to-date, sales are up more than 23 percent. The most recent Case-Shiller Index report shows prices also turning positive for Boston in April – if only modestly – up .1 percent year-over-year, an indication as clear as any that we may finally have hit bottom.

And even as prices bottom, hard-hit homeowners are finally getting some help.

Gaining Traction

Considered a damp squib after its initial launch in 2009, the federal government’s Home Affordable Modification Program (HAMP) was reworked last year to make underwater homeowners eligible for the first time. New changes to the program also aim to incentivize participating banks into reducing the outstanding principal amount on their loans, rather than just re-jiggerring payment terms.

And it seems to be having an effect: According to the latest figures from the Treasury Department, in May 70 percent of eligible homeowners nationwide were receiving permanent modifications, up from 50 percent last year. In Massachusetts, 21,368 modifications have been completed so far, 2.4 percent of the national total.

And lenders are acting on their own, as well. Spurred in part by the 50 states’ attorneys general settlement with the largest banks, big banks are voluntarily reducing principal as part of many more modification agreements. A new report by Texas-based Amherst Securities Group, based on an analysis of data from the Office of the Comptroller of the Currency, showed principal reductions by servicers have risen to about 40 percent of total modifications, up from 25 percent in 2011 and 11 percent in 2010. 

And Fannie and Freddie’s own loan modification program, the Home Affordable Refinance Program (HARP) has also seen the number of modifications completed double in the first quarter of this year, now that restrictions on refinancing underwater borrowers have been lifted.

Catch-22

While a flood of foreclosures could still destabilize the market, for now, disposing of distressed properties is going a lot smoother. Unlike in the past, when trying to complete a short sale meant six months of tear-your-hair-out negotiations, “It has improved. I would say that all the banks have improved as a whole,” said Anthony Lamacchia, co-broker/owner of McGeough Lamacchia Realty in Waltham. “We still have to push constantly, but overall I think it is faster. We are getting our short sales approved in 4-8 weeks from the time that we submit the package.”

But even though we may be on the way back up, it could still be a rough ride. Zillow economists warned. That instead of steadily rising prices, we may see upward serks followed by the periods of stagnation.

“Our emerging hypothesis is that, instead of a long, flat bottom,” wrote Stan Humphries, staff economist for Zillow, we might end up with “cycles of home value spikes followed by cooling periods. These cooling periods are created once local home values have risen enough to free some homeowners from negative equity, at which point some of these resurfacing homeowners attempt to sell their homes, thus creating additional supply which tempers price appreciation.”