Right now, the talk around Seattle, where I live and work, is all about the long-awaited rise in home prices.

On a local, as well as national, basis there is clear evidence of home values rising so far this summer. Several data sources that look at national price levels are all showing roughly the same, but there was one that stuck out. Clear Capital published a report suggesting that sale prices were up by 1.7% across the U.S. during the second quarter, and that “the West led the regions in price recovery and forecasted growth.”

They even went as far as to suggest that the Seattle-Bellevue-Tacoma market should exhibit annual price growth of 14.4% by year’s end, and that this market ranked first out of all the metropolitan areas analyzed.

But before we start celebrating the long awaited return of the market, I want to add a few words of caution to this very rosy story.

The data that I am looking at does, indeed, show several regions that have seen an extraordinarily good second quarter, but there is also data that suggests that we should not get too excited too quickly – and it’s all about foreclosures.

Whilst it’s undoubtedly true that foreclosures brought home prices down initially, they actually then started driving them up due to rabid demand from both investors and first-time buyers who were looking for bargains. (This has certainly been the case here in Seattle where over 30% of all transactions in 2011 were all-cash, investor purchases.)

Supplies of these cheap homes have now started to dwindle as banks continue their efforts to modify many underwater loans. Additionally, states that require a judge in the foreclosure process are facing a huge backlog that is dramatically lowering — albeit temporarily — the number of distressed units for sale.

Additional scrutiny on how lenders and servicers process foreclosures, along with aggressive foreclosure prevention efforts by the federal government, and several state governments, continue to hobble the foreclosure market at a national level.

Combining these two things indicates that prices are now being driven higher by the sale of more expensive, non-distressed units.

“So it’s all good”, I hear you way.  Well hold on just a minute.

Overall foreclosure activity was down in the second quarter of this year, driven primarily by a drop in bank repossessions (REO’s). But according to RealtyTrak, 311,010 properties started the foreclosure process during second quarter, which represents a nine percent increase from the previous quarter and a six percent increase from the second quarter of 2011. This marks the first year-over-year increase in quarterly foreclosure starts since the fourth quarter of 2009.

It looks to me as if lenders are now, slowly but surely, catching up with the backlog of delinquent loans, which is why the average time to complete the foreclosure process started to level off, or decrease in some states, in the second quarter.

I believe that the increases in foreclosure starts in the first half of this year will likely translate into more short sales and bank repossessions in the second half of 2012 and into next year.

What does this mean? If we see a dramatic increase in distressed listings, in concert with a persistently low level of non-distressed homes coming to market, we are sure to lose the price gains that we have been seeing recently.

That said, I would add that not all markets are equal, and some will certainly do better than others, but I am afraid that it is still too early to call a bottom on the U.S. housing market just yet.

I have to say, as I pore over the streams of real estate related data that I receive every day, the world appears to be in a better position now than I have seen in several years.

Certainly, there are still certain groups that believe that the housing market is still set to plunge into their version of Dante’s abyss; however, I feel differently for several reasons that I believe are worth taking a look at.

1. Financing – for a period after the bursting of the housing bubble, mortgages became almost non-existent (especially non-conforming loans). From 2009 into 2011, credit requirements and down payments rocketed, and in 2011, one in three deals fell apart over financing.[1] Since that time, however, it is clear that financing — although still stricter than it was — has eased somewhat and even the jumbo market has improved substantially.

Mortgage rates are currently at levels not seen in over 65 years (thank you, Greece) and are unlikely to rise in any substantive manner in the foreseeable future.  As such, the ratio of mortgage debt payments to disposable personal income is as low now as it was back in 1993.

1. Employment – From its peak in January 2008 to its trough in February of 2010, the U.S. lost almost 8.8 million jobs. Since that time we have recovered 3.745 million jobs. This is actually more impressive than one may think, as almost all of the recovery has come from the private sector, while national, state, and local government continues to shed jobs at an unprecedented rate.

Irrespective of this, I am hearing from many people that they are less fearful of losing their jobs now than in a long time. This is important as employment stability is crucial if one is considering any major purchase – and a home is certainly a major one!

1. Home Prices – This is really the crux of the issue. Data that was released from several sources seems to indicate that we are at the bottom of the market. The question is, how long will we stay there. Case Shiller data, released earlier in the week, suggested that the pace of decline in values continues to slow. Other indices, such as the Federal Housing Finance Agency, show a very modest increase in values in Q1 2012 (not seen since 2007), and the National Association of Realtors suggests that prices are “firming in many metropolitan areas”.

This is all good news, but as I suggested earlier, there are still uncertainties in front of us. We continue to look at Europe with more than a certain amount of concern. As if the situation in Greece wasn’t enough, contagion appears to be spreading to other places, such as Spain. This is far more disconcerting, as Spain is a much larger economy, and it is uncertain if Europe will be able to bail them out.

Our recovery, although still fragile, is a recovery. Housing has dropped to prices that are not likely to be seen again with some transactions coming in well below replacement cost. I contend that as long as we consider housing to be a home first, rather than an investment, we are looking better now than we have in several years.

The percentage of all cash sales are reaching record levels – a sign that investors have returned to the market. Inventory levels are as low as I have seen them in several years which can be construed as either a good or a bad thing (depending on if you are a buyer or seller!).

With all of this in mind, my advice to buyers is that as long as you are able to meet your mortgage obligations, do not plan to sell again in the near term, and are not looking to their house as a “get rich quick” scheme, now may well be the time to seriously consider your options.