Real estate agent Edward Browne, center, shows a West Babylon...

Real estate agent Edward Browne, center, shows a West Babylon property to possible buyers last week. (July 21, 2013) Credit: Newsday / Thomas A. Ferrara

Long Island's real estate market is rising. Don't expect it to soar.

The local housing market in June posted some of the highest median prices in three years: $425,000 in Nassau County and $340,000 in Suffolk, according to the Multiple Listing Service of Long Island. Sales activity was brisk, with 2,048 homes changing hands, more than twice as many as in the doldrums of early 2009.

A shortage of homes for sale -- plus buyers' sense that mortgage rates will keep rising -- has sparked "feeding frenzies" at some open houses, with sale prices occasionally exceeding list prices, said Marie Asher, an associate broker with Century 21 American Homes in East Meadow.

"The market has totally changed," she said. "I don't want to say it's a seller's market, but we're heading that way."

A close look at the Island's housing market, however, shows signs of lingering distress among homeowners. That distress is likely to keep the recent sprint from turning into a marathon.

Nearly 1 in 10 homeowners with mortgages here owes more than their homes' value. The number of initial foreclosure filings is on the rise, after a brief respite last year. Banks continue to impose tight lending standards on would-be buyers. And if interest rates jump much more, the higher cost of borrowing could choke off some buying.

Plus, the Island's economy remains troubled. And home prices on Nassau's South Shore, in particular, are still suffering the aftereffects of superstorm Sandy, which hit on Oct. 29.

"The housing market continues to recover from its recent lows, but a plateau is in sight," said Irwin Kellner, Port Washington-based chief economist for Prices could rise by 10 percent to 15 percent, but they are likely to level off next year as interest rates continue to climb, Kellner predicted.

To be sure, the local housing market is increasingly favorable to sellers -- particularly in areas not damaged by Sandy.

Quick deal surprises seller

Dottie Weremeychik recently found a buyer for her late uncle's four-bedroom Cape in Hicksville. The home was listed at just under $330,000 in March, quickly garnered four offers and went into contract within six weeks for close to the list price, to a family buying their first home, according to Asher, who handled the sale.

"I was totally shocked," said Weremeychik, a Wantagh resident. "I was truly expecting the house to sit for a very, very long time."

Some first-time home buyers say they want to jump in soon, before prices and interest rates rise further. The average rate for a 30-year fixed-rate loan recently hit 4.31 percent, according to Freddie Mac. The record low was 3.31 percent, reached in November 2012. In May, the average rate was 3.35 percent. Higher interest rates tend to put a damper on home sales, since they price some buyers out of the market.

For now, though, rising interest rates have delivered a jolt of activity. Buyers "are realizing that the bottom has been hit," said Marianne Garvin, chief executive of the Community Development Corp. of Long Island.

That's a belief shared by Wendy Brennan, a mother of three who hopes to buy a home this summer in Babylon Village, where she now rents an apartment. "I need to ensure that I get in now before it starts to get too crazy," she said. "We love our neighborhood so we're really trying to stay in the district, but everything that's available to us at this point is in the flood zone . . . Finding a house within my price range with enough space for us is very, very, very difficult."

With inventory falling, Brennan is not the only buyer struggling to find a good home at an affordable price. It would take 8.6 months to sell all listed homes on the Island at the current pace of sales -- the shortest time in two years, according to a Newsday analysis of data supplied by the Multiple Listing Service of Long Island. By contrast, it would have taken nearly twice as long in April 2012.

That scarcity of homes could be a sign of the market's troubles. Carol Yopp, foreclosure prevention manager at the Long Island Housing Partnership in Hauppauge, said she has many clients who would like to sell but can't.

"They owe $300,000 on a house that's worth maybe $125,000," Yopp said. "They have kids in school, and they have jobs that they can't just pick up and leave . . . They can't sell it, they can't move, so what do they do?"

Upside down on mortgages

Nearly 50,000 Long Island households -- 9.2 percent of all those with mortgages -- were upside down on their mortgages in the first three months of 2013, according to the most recent report by national data firm CoreLogic.

Even those who do have equity cannot always afford to sell. Homeowners should have about 20 percent equity to trade up, and many fall far short, said Richard Guardino, executive dean of the Wilbur F. Breslin Center for Real Estate Studies at Hofstra University. The recent rise in home prices, he said, "is giving people confidence that they can hold on, that they have equity in their homes. I just think it's going to be a very slow recovery."

Negative equity and the threat of rising interest rates are not the only factors likely to limit how high home prices will go, economists and real estate experts say.

Foreclosures continue to plague the Island's homeowners. Lenders filed initial foreclosure documents for nearly 8,700 homeowners in the first half of the year -- 56 percent more than in the same period last year, and nearly as many as in the same January-to-June periods during the depths of the foreclosure crisis in 2008 and 2009, according to a Newsday analysis of data supplied by Brightwaters real estate information service LI Profiles. "It's disturbing that 2013 looks so similar to 2008," said Susan Vincennie, president of LI Profiles.

Even as the country begins to emerge from the foreclosure crisis, Island mortgages are twice as likely as mortgages nationwide to be in foreclosure, according to Lender Processing Services, a Jacksonville, Fla.-based firm. In Suffolk County, 8.3 percent of homeowners with mortgages were in foreclosure in May, according to the most recent report by LPS. The share in Nassau County was 6.1 percent. The national rate was 3 percent.

What's more, superstorm Sandy still casts a cloud over certain areas. In the second quarter, home prices along Nassau's South Shore fell 18.7 percent from a year earlier, to $298,700, according to a recent report from the appraiser Miller Samuel and the brokerage Douglas Elliman. Some buyers are hesitant to purchase waterfront homes, and many homeowners are still undecided about whether to rebuild. "There are still many listings on the South Shore that are sitting there because people still have not figured out economically how to turn that house into an affordable, risk-free home," said Joe Moshé, broker/owner of Plainview-based Charles Rutenberg Realty.

Banks' lending standards remain far tighter than before the housing bubble burst in 2007, and many hoped-for sales fall apart when buyers fail to qualify -- in some cases because they cannot afford the higher payments that come with rising interest rates -- or appraisals come in too low. The comparable sales that banks use to determine the value of a home are typically based on deals struck several months ago, before the recent rise in prices.

Issues with economy

Even the signs of life in the Island's economy come with caveats. Unemployment dropped sharply last month to 6.1 percent, from 7.5 percent a year earlier, according to the state Labor Department. However, Kellner said, "because the composition of jobs is skewing towards the lower-paying jobs, that is also limiting the ability of people to buy houses."

From 2008 to 2011, Nassau County's median household income dropped by 6.8 percent, from $98,103 to $91,414 in inflation-adjusted dollars, according to the most recent available census data. Suffolk households' median income declined by 6 percent over the same period, from $89,490 to $84,106. For Island homes to truly be affordable, they would need to fall to two to 21/2 times household income, Kellner said.

During the run-up in real estate prices that ended in 2007, many homes were selling for five or six times median household income. "That was only doable because lenders were making very generous loans," Kellner said. "I don't see home prices, in general, returning to their previous peaks."

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