If you've become comfortable with the current state of the housing market ... don't. Economists at Goldman Sachs (NYSE: GS) and Bank of America's Merrill Lynch (NYSE: BAC) say there's still plenty of risk in the housing market.

Alec Phillips, the head of Goldman's Washington office, said, "The risk of renewed home price declines remains significant." His "working assumption" is a drop of between 5% and 10% by the middle of next year.

Existing homes are starting to move again. Last month, home resales hit their highest level in more than two years, thrashing expectations. The 9.4% increase in home resales -- which entails a seasonally adjusted rate of 5.57 million -- is attributed largely to the deadline for the first-time home buyer tax credit.

According to the National Association of Realtors, the annualized, seasonally adjusted rate is up from the 5.1 million in August and far ahead of the 5.35 million expected for September (based on economists surveyed by Thomson Reuters).

The market seems to want to go up each day as it has relentlessly almost every trading session since April. But yesterday, it had a tiny setback after the FOMC announcement. Today the culprit was housing. The National Association of Realtors said existing home sales declined 2.7% in August. Every economist worth his salt said the number would rise.

Good news on the unemployment front did give the market an early boost this morning. Within an hour, though, bad news on the housing sales front wiped out the gains and moved the major indices into negative territory, where they have remained.

Here were today's unofficial closing numbers:

Dow 9,706.99 -41.56 (-0.43%)
S&P 500 1,050.78 -10.09 (-0.95%)
Nasdaq 2,107.61 -23.81 (-1.12%)

Shares of home-builder Hovnanian Enterprises Inc. (NYSE: HOV) fell sharply in trading Thursday, a day after the company reported a bigger loss than Wall Street had anticipated. By early afternoon, shares of the New Jersey-based company had fallen more than 13% to just over $4 a share.

In reporting its fiscal third quarter earnings Wednesday, Hovnanian said it lost $168.9 million, or $2.16 a share, in the three months ending July 31. That compares with a loss of $202.5 million, or $2.67 a share, in the year-earlier period. Revenue fell 45% to $387.1 million. The company noted its latest quarterly results included $105.7 million in pretax charges to reflect the declining value of land and other assets.

July was a good month for new home sales, which saw an increase of 9.6 percent during the month.

Before we look at the good news, let's cover the bad news first. Even with the jump in sales in July, new home sales are still well below their peak four years ago. In fact, new home sales are 69 percent below their peaks when the housing market was at its best.

It looks like the housing market is coming back, but there's still reason to be careful. In July, home resales had their highest monthly increase in at least a decade. The rush is driven in part by a tax credit that expires on November 30, 2009. The rate of sale grew 7.2%, ahead of expectations.

Last month, sales hit a seasonally adjusted annual rate of 5.24 million in July -- up from a 4.89 million in June. This is the fourth month in a row in which seasonally adjusted sales increased, and it was the strongest growth rate since August 2007. A Thomson Reuters survey had forecast 5 million, but the reality exceeded that.

There's good news and bad news about the mortgage market. The good news is that you can get your information from a variety of sources. The bad news? You really need to get your news from a variety of sources.

Conflicting reports Wednesday suggest that mortgage applications are up -- and down.

Deutsche Bank (NYSE: DB) expects almost half of all U.S. homeowners to be underwater -- figuratively, of course -- by 2011.

Declines in home prices and the fact that some of those difficult mortgages just aren't going away put 26% of homeowners in this situation by the end of last March, and it seems the situation is only going to get worse. Unlike the early stages of the credit crisis, which were driven by subprime mortgages, the next iteration will have a greater effect on prime mortgage borrowers, which comprise two-thirds of the loans outstanding.

The economy is sending mixed signals right now.

Unemployment is up, and consumer sentiment is down. Plenty of companies are posting profits, but they're taking advantage of lower expectations and cost-cutting rather than revenue growth from an economic recovery. Rents are under pressure – both residential and commercial.

There is a speck of good news in the housing market. According to the Federal Housing Finance Agency, U.S. home prices actually rose 0.9% from April to May, but overall were down 5.6% from a year earlier.

This was the news against the backdrop of a continuing deterioration in the overall market. Let's look at the big picture for a moment:

• U.S. delinquency rate rose to a seasonally adjusted 9.12% and the foreclosure rate rose to 1.37% the highest since records were kept in 1972.
• One in every eight Americans is now late on their home loan payment or already in foreclosure, according to Jay Brinkmann of the Washington-based bankers' group.
• Notices of default, auction or bank seizure rose to a record in the first half of 2009.
• Realty Trac Inc. reports that one in every 84 U.S. households received a foreclosure filing in July. That was a 15% increase from a year earlier.

We have all been waiting to hear news that the housing market has rebounded, and we got a little indication that things were improving today as homebuilder sentiment rose this month to its highest level since September.

According to the National Association of Home Builders its index of builder confidence jumped two points in July to 17. This is the first time the index has hit 17 since last September.

Home foreclosure filings in the United States hit a record 1.9 million in the first half of 2009, according to RealtyTrac –-- on more than 1.5 million properties. Again, unemployment is one of the primary culprits, as a lack of income makes it pretty tough to bring a loan at risk of default up to date. The number of filings is up 9% from the second half of 2008 and up almost 15% from the same period last year.

Last month, foreclosure filings were up 5% relative to May and up 33% from June 2008. The month's action was the third highest on record, and it was the fourth month in a row in which there were filings on more than 300,000 properties.

Early estimates of a contraction in the U.K. economy were not enough. First quarter 2009 estimates were revisited, showing a 2.4% fall in gross domestic product from the last quarter of 2008 to 2009. This downward revision made the first three months of the year the worst since people wore skinny ties, hated communism, and bore nicknames like "Buzz."

In the second quarter of 1958, U.K. GDP plummeted 2.6%, though the 2.4% threshold matches the depths hit in 1979. The original 2009 Q1 estimate was -1.9%, according to the Office for National Statistics in London.

Lennar (NYSE: LEN), whose colleagues include Toll Brothers (NYSE: TOL) and D.R. Horton (NYSE: DHI), reported earnings for the second quarter on Thursday. Since it is a homebuilder, you can expect that it would be a tough one to look at in many respects. There was a revenue decline of over 20%. And there was no profit. Lennar said it lost 76 cents per diluted share.

According to Michael Fowlkes and his earnings preview, Lennar did not satisfy Wall Street's outlook. Analysts were expecting a loss somewhere closer to 63 cents per share. That didn't stop the stock from going up, though. Lennar closed higher yesterday by over 17%. Volume was likewise incredible. Apparently, the market was focusing on the revenue beat.

Late Tuesday, Freddie Mac (NYSE: FRE) reported that its quarterly net loss checked in at $9.9 billion thanks to rising delinquencies. The company also blamed the results on continued impairments on its holdings of mortgage-backed securities. On a per share basis, FRE's quarterly loss increased to $3.14 a share, compared to $151 million a year ago, or 66 cents a share. The mortgage lender's total revenue dropped to $771 million from $1.41 billion a year ago.

FRE put aside $8.8 billion in provisions in order to cover credit losses for the first quarter, up from $7 billion in the final quarter of 2008. FRE attributed this to the increase in the number and rate of delinquent mortgages, coupled with increasing foreclosure-related losses.