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.

A little more good news for the struggling housing market Tuesday, as a closely watched home price index showed increases in prices for the third straight month in July.

The news comes from the Standard & Poor's/Case-Shiller home price index, which shows that home prices rose by 1.2% from June to July.

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.

Homebuilder confidence hit a 1 year high today, providing another sign that the worst of the housing melt down may have passed.

The housing market started to crumble back in 2006, and since that time foreclosures and falling home prices have hit the economy hard, and played a major role in the recession that has effected millions. Today the The National Association of Home Builders/Wells Fargo confidence index climbed to 18, the highest level that it has been since June 2008.

Home improvement retailer Lowe's Companies (NYSE: LOW) will be reporting its second quarter earnings before the market opens on Monday, and there are some positive indicators that it may have been a good quarter for the company.

Over the past year, weak consumer confidence has put a strain on Lowe's, as home owners who have worried about job security and a weak housing market have put off home repair projects. As a result, Lowe's stock fell as low as $13.00 back in March, but has rebounded nicely over the past few months to its current trading price of $22.71.

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.

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.

At times, during this protracted global recession, it seems as if the entire world depended on home equity loan-fueled U.S. consumption to maintain GDP growth.

De-coupling -- the notion that the emerging market economies of China, India, Brazil and Russia were independent of the developed world, from a GDP growth standpoint, and were self-sustaining -- has been quickly dispelled. "De-coupling" has about as much validity as another ruse that made the rounds in the last boom (as it does in all expansions): the fallacy of "this time it's different" – the notion that some economic phenomenon can continue indefinitely. During the last expansion there was a widely-held view that housing prices, despite numerous metrics that showed that housing prices had hit bubble levels, could rise at double-digit rates annually, for a decade or more.

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.

It was the largest jump in three months, as new home construction increased by 17.2% during the last month.

The increase was much higher than analysts had been expecting, and last month we moved up to an annual rate of 532,000 units... well above the 500,000 units that had been forecast.

As the housing market continues to find its footing, one welcome trend for potential home buyers has been falling home prices. The main consequence of the troubled housing market has been a sharp increase in home inventories, and this has led to a massive drop in home prices, and we see news today that home prices are the most affordable that they have been in the past 18 years.

The Housing Opportunity Index tracks home prices, and it reported that during the first three months of this year, 72.5% of homes for sale fell within the affordability range, up from 60% during the last quarter of 2008. This sharp jump is another testament to just how quickly home prices have eroded over the past few months.

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.

As we all know, the housing market has been taking a beating over the past couple years. The global recession seemed to spark right out of the American housing market, and things have not really been improving too much. With all the homes that are unsold in the country, more and more homeowners have decided to rent instead of sell their properties.

As the housing market began to come apart at the seams, home inventories started to swell, and prices started to drop. Everyone has been waiting anxiously to see a point where the lower prices would bring massive buyers back into the market, but that still has not happened yet, and instead of lowering prices even further, homeowners have decided to hold onto properties a little longer and pull in some rental income instead.

We will see earnings from one of the major home builders in the morning, as KB Home (NYSE: KBH) gets its chance to impress Wall Street when it reports its first quarter numbers prior to the market open.

The company, which last year ranked the 5th largest home builder in the country, is expected to show a loss for the quarter of $0.81 per share. Should the company be able to match these estimates, it would be a great improvement over its fourth quarter loss of $3.96 per share. When looking back at the same period last year, KBH showed a loss of $3.47 per share for its first quarter last year.

Wall Street is trading up nicely today, in part due to the news that new home sales made a big jump last month.

The sales figures for February are a welcome relief after we saw January hit a record low. During February, however, new home sales did pick up, and gained 4.7% during the month. While we have to keep in mind that February sales do rank second worst on record, it is encouraging to see things move in the right direction.