Housing Market on Long Road to Recovery, Capital Economics Says

The housing market is healing, a ""Capital Economics"":http://www.capitaleconomics.com/ report stated, but the road to recovery will be a long and gradual one. The research firm expects to see home sales and homebuilding continue with increases, while house prices are expected to finally stop falling later this year.

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While certain areas of the housing market appear to be moving in a positive direction, Capital Economics still points out that with growth come constraints.

Here are excerpts of issues and explanations analyzed in the report.

_Eurozone_

""It is hard to believe that events in Europe will not contribute to keeping U.S. growth relatively low by historical standards.""

""Perhaps more importantly the US is not immune to a big external shock, namely the danger that Greece defaults and leaves the euro-zone. This would then lead to speculation that other euro-zone countries would follow suit. Even if the euro-zone remained intact, the austerity required would drive the region into a deep recession, causing a sharp drop in US exports.""

_Lending standards_

""The Fed's latest Senior Loan Officer survey is worrying as it suggests that in response to the crisis in Europe, some banks in the US have already started to tighten lending standards for businesses once again.""

""More importantly, with over 30 percent of purchases currently being cancelled each month, a third of which is due to problems getting a mortgage, it is clear that overall lending conditions remain strict.""

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_Housing supply_

""The excess supply has continued to diminish at a dramatic rate. But supply is unlikely to fall much further when the recent robo-signing mortgage settlement means that many foreclosures could soon be released onto the market.""

""However, we estimate that there are still four million homes in the so-called shadow inventory. At some point, the bulk of these will be put up for sale. Of course, all these foreclosures won't come onto the market at once. But although they may not boost supply, they will certainly prevent it from falling much further.""

While there are factors hindering growth, the report highlights areas encouraging restoration in the housing sector.

_Home sales_

""The abundance of heavily-discounted foreclosed homes means that the rebound in sales of existing homes will continue to be stronger than for new homes.""

""The 13 percent rise in existing home sales in the six months to January confirms that a gradual
recovery in housing demand is underway. Even the new homes market has started to get
in on the action, with new sales rising by 11 percent in the last five months. In contrast to 2010, this improvement is not being driven by temporary tax breaks.""

_Employment_

""And the recent run of better news on jobs, which culminated in the 257,000 gain in private payrolls in January, suggests that the labor market may have finally turned a corner.""

_Mortgage rates_

""Our forecast that 30-year mortgage rates will remain close to the current record low of 4.1 percent, if not fall a little further, contrasts with other views that rates will rebound to above 5 percent.""

""Indeed, if mortgage rates were to fall a little lower, then the monthly interest and principal payment would decline to a new record low of 11 percent of the median income. That would be down from 25 percent six years ago. Even if mortgage rates were to rise above 5 percent, the initial monthly payment would still not be much of a burden.""

Even with greater affordability due to lower rates and dropping home prices, Capital Economics states that the lingering problem is that many households are unable to take advantage.