Columbia SC Housing Recovery: 2012 Could Be The First Year

From peak levels five years ago, home prices are down more than 30 percent, combined sales of new and existing homes are nearly 40 percent lower, and new home construction has plunged more than 70 percent.

However, several factors are falling into place that will support  gradual progress in the coming year as long as the economy doesn’t tip back into recession.

Most important, analysts increasingly believe that 2011 will mark the bottom in home prices. Most national price indexes adjusted for seasonal influences have stopped falling on a month-to-month basis.

The demand side of the housing outlook is somewhat of a paradox. Attractive home prices and super-low mortgage rates have made homes the most affordable in the postwar period. Yet, demand continues to languish. Sales of existing homes were up in October and have mostly bounced around the current level this year. NAR chief economist Lawrence Yun says that despite historic affordability and more credit-worthy borrowers, the share of contract failures is double that in October 2010. Cancellations last month were reported by 18 percent of NAR members, says Yun, up from 9 percent last year.

Tight loan standards and weak job markets in recent years have sharply reduced people’s willingness and ability to start a household, which continues to weigh heavily on home demand. Since 2006, the rate of household formation has slowed dramatically. The current number of U.S. households is about 4.9 million below what the trend prior to the recession would have predicted.

The Barclays outlook expects prices to end 2011 close to 2 percent below a year ago and then increase modestly by about 1.5 percent in 2012. Those projections are similar to most, but with one key assumption: The U.S. doesn’t relapse into a recession, caused by the failure of policymakers in Europe to prevent a full-blown financial crisis or by actions of U.S. policymakers that would impose excessive budget tightening next year. In a recession scenario, the analysts project an additional 7 percent drop in house prices, accompanied by a 12 percent jobless rate.

Barring that, 2012 is set to be the first year of the housing recovery, but it may not feel like one until mortgage restrictions ease and the labor markets are strong enough to offer more support.