2012 housing outlook: A slow recovery

By Lauren Bloom

2011 has been a long, difficult year, with the economy continuing to limp along, unemployment hovering around 9%, Occupy Wall Street protesters demonstrating in most major cities and Congress displaying an embarrassing inability to put partisan politics aside and address the nation's economic problems.

As the end of the year approaches, one can't help but hope for better news in the year ahead. Hope is not a strategy, however. To see whether 2012 will be any better, let's look at one key economic sector: the nation's housing market.

Trends in the housing market tend to provide good evidence of where the overall economy and consumer confidence are headed. People usually don't buy houses when they can't afford to do so, notwithstanding the housing bubble that culminated in the financial crisis of 2008.

Consumers who can't produce solid job histories and reasonable down payments won't be approved for mortgages. (Again, putting aside the insanity that generated the subprime mortgage debacle.) Consequently, an uptick in new housing construction or purchase of existing homes should suggest that the economy as a whole is improving.

It's also good news for retailers like Bed, Bath & Beyond (BBBY), Home Depot (HD), Lowe's (LOW), Target (TGT) and Wal-Mart (WMT) that cater to new homeowners.

A quick survey of the experts suggests, however, that the immediate future of the housing market is by no means clear, and it hasn't been for some time. In November 2008, just as the economy was collapsing, the Congressional Budget Office issued a report presenting three possible scenarios for new housing starts in 2009-2012.

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Based on three factors -- number of new households, trends in the overall economy and number of existing, unoccupied units -- the CBO predicted eventual growth in new-home starts. However, using the CBO's most pessimistic scenario, which most closely resembles what actually happened over the past three years, new housing starts aren't likely to increase until the second half of 2012.

The CBO's most pessimistic estimate appears to be borne out by more recent projections. For example, CNN recently surveyed 21 economists to develop a composite picture of when the economy is likely to recover. Though cautiously optimistic about GDP growth, those economists apparently agreed that housing and employment would remain slow for at least the first half of 2012. Separately, CNN has predicted that the median price of U.S. homes will drop 3.6% in the coming year, and won't start to improve until after July.

That's the bad news. The good news is that the housing market will improve in 2012, even if it does so later than investors and homeowners might have hoped. A review of the CBO's factors explains why. We know that the recession has hit young adults the hardest, with high unemployment rates and hefty student loans battering them from both sides. Twenty-somethings who have moved back in with their parents and put off marriages and new homes are bound to get restless eventually. When they do, the number of new households in the U.S. will once again start to climb.

Similarly, high unemployment rates and fear of losing money on underwater mortgages have kept many homeowners in their current residences, and millions of foreclosures have glutted the market with empty homes. As the unemployment rate slowly shrinks -- the U.S. reportedly added more than 650,000 new jobs in the past three months -- home sales are likely to rise. Foreclosed properties will still glut the market, but most of those homes will eventually find new owners.

The challenge, of course, is projecting any kind of rebound in the housing market when the economy is still so vulnerable to outside influences. Another eruption of the European debt crisis, for example, could quickly destroy the small gains of the past few months. For the time being, would-be real estate investors would probably be smart to focus on regional markets that are recovering more quickly, and to steer clear of higher-end luxury properties that may be more difficult to sell.

Developers might be wise to focus on building more modest homes than the McMansions that currently sprawl across too many American suburbs. And retailers who sell home goods should probably continue to emphasize home improvement and redecorating over furnishings for new homes for the next six months or so. Whether consumers plan to stay in their existing homes or refurbish them for sale, there will probably be a decent market for paint, blinds and carpet.

2011 has been tough, and it appears that the first half of 2012 may be, too. But by the end of next year the troubles in the housing market may become just a bad memory.