Will Housing Market Finally Rebound In 2012?

Could Housing Market Rejoin The Living In 2012?

Just as housing was the first bubble to burst, sinking the American economy into crisis, a revived housing market could force some life back into the listless economy. The only questions are if and when the market will improve. Because it certainly didn't this year.

Housing prices hit a low in 2011 not seen since 2002, losing an average of nearly one-third of their 2006 peak value and creating a "double dip" decline, according to the S&P/Case-Shiller National Price Index. As a result, nearly one-quarter of all homeowners are underwater, owing an average of $75,000 more on their mortgage than the home is worth, according to research firm CoreLogic.

But one leading real estate analyst thinks 2012 will be better. Tom Lawler, an independent consultant who retired from Fannie Mae in 2006 after 22 years at the mortgage giant -- and after predicting the impending end of the housing bubble at the height of the boom -- sees potential in the continued dearth of newly built homes, a slowly rebounding job market and a population in need of housing.

Lawler is not alone in his optimism. Stocks of homebuilders are trading 30 percent higher since the end of the third quarter and large hedge funds like Blackstone Group are making housing-related investments, reports the Wall Street Journal. Earlier this month, Goldman Sachs stated that "the housing-price bottom is probably in sight," adding that although home prices could decline in 2012, there should be a 30 percent gain over the next decade.

The newly bullish real estate market and analysts like Lawler anticipate increased housing demand in 2012. Specifically, Lawler predicts a rebound in headship rates, defined as the number of people who qualify as the head of a household -- which matters to housing economists because each head of household represents a home.

In the first half of the decade, roughly 1.3 million new households formed each year, according to Harvard University's Joint Center for Housing Studies. Since 2005, that number has dropped to less than a million per year. Some of the decrease is due to declining immigration. Another chunk can be blamed on the hesitance of 20- and 30-something Americans to become heads of household.

While economists like Freddie Mac's Frank Northcut have argued that the downward trend in household growth will stifle the housing market in 2012, Lawler believes it represents an opportunity.

"The job market has been terrible, and it hit younger people very hard," he said. "As a result, we've seen more young people staying in school, or moving home with their parents, or sharing a place with roommates. But those aren't permanent situations. Instead, it suggests an emerging, pent-up demand because they are going to ultimately form their own households."

The Joint Center for Housing Studies seems to agree, as the group projects total household growth at about 12.5 to 14.8 million over the decade.

When Americans do go looking for housing, the market will be helped by the fact that relatively few new homes are currently under construction, Lawler notes. For 16 consecutive years -- 1992 to 2007 -- at least a million new single-family homes were built every year, according to the National Association of Home Builders. By 2010, that number had dropped to almost 471,000, and early estimates predict that it fell even further this year.

As long as new construction remains low, people will turn to the stock of existing homes, purchasing those now sitting empty and thereby helping to clear the market.

In other good news for the housing market, the number of job layoffs has been steadily declining, as reported earlier this week by the Labor Department, while the unemployment rate dropped from 9 percent in October to 8.6 percent in November. Most analysts agree that the job and housing markets are linked. As more people find work, they are better able to qualify for a mortgage and more likely to buy a home.

Lawler cautions that there is one large unknown complicating predictions: the "shadow inventory." That is, homes that are not yet for sale but likely will come up for sale because the current homeowner is seriously behind on the mortgage payments.

"In a normal world, which we haven't been in for so long, those loans would have been dealt with one way or another," Lawler said. "But in our abnormal world, it's all unknown."

He added, "If you didn't know about that shadow inventory, you'd say, 'My god, it's a slam dunk that 2012 looks better.'"

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