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Prices to Gain by 2% in 2012 and 5% in 2013: Capital Economics

The recent softening of economic activity will not stop the country's housing market recovery, ""Capital Economics"":http://www.capitaleconomics.com/ said in a report Wednesday.

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The _US Housing Market Analyst_ for Q2 2012 speculated that modest recovery in the housing market will not only continue for the rest of the year, it will spread and cause an increase in house prices. The recovery will spring from positive valuations and investor activity, the report said.

""Extremely favourable valuations are the foundations on which the housing recovery will be built. But with credit conditions remaining exceptionally tight, it will be cash-buyers and investors who will be able to take advantage and drive a gradual improvement in housing market demand,"" said the report.

With the modest upturn in home sales going on, Capital Economics revised its house price forecast to show gains of 2 percent in 2012 and 5 percent in 2013.

The report pointed to the commercial real estate recovery in the 1990s, which was driven by new sources of investor capital following earlier price falls. This example suggests that institutional and private-equity investors could play the same role in the current housing upturn.

For the time being, Capital Economics said it does not expect the recent slowing of economic growth to develop into a more serious issue. However, the report noted that current forecasts are made under the assumption that the United States would shrug off the economic crisis occurring in the euro zone. Should that crisis lead to a second global credit crunch, mortgage rates would shift back up.

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The report also speculated that the national mortgage settlement may lead to a transfer of shadow inventory into the visible supply, unbalancing the recent improvement in demand. If these events happen, housing prices could fall at the rate of five percent a year for several years.

While the changes to Capital Economics' forecast reflect a faster recovery, the report stressed that the recovery will be different from state to state. Based on the economic backdrop and supply and demand, relative rankings indicate that Connecticut, Oregon, and Washington may wait the longest before seeing a true recovery. Home prices have fallen in these states over the past year, likely as a result of subdued personal income growth.

It was also suggested that judicial foreclosure states are likely to face slower recoveries. Because of the hefty foreclosure backlogs, the slow introduction of properties onto the market over the next few years will keep supply elevated and postpone a price recovery.

For the most part, states in which housing is significantly undervalued are expected to see price increases in the coming years. The exception is Nevada, where undervalued housing continues to drop in price. An estimated 61 percent of mortgage holders in the state are in negative equity, ""which is crimping demand.""

Recent trends also point to a continued increase in housing starts. While starts fell 4.8 percent month-over-month in May, a surge in building permits suggest that starts may hit a new high for this recovery within the next few months. Other indicators for an increase in starts include a rise in the volume of lumber being transported (suggesting that homebuilders may be stockpiling to increase production), recent gains in the NAHB homebuilder confidence index, and a continued fall in construction cost inflation. Homebuilders may also feel encouraged by a rise in the proportion of homes selling before construction is finished or even started.

From this, Capital Economics said it expects housing starts to continue rising at a modest pace. Starts may improve to 750,000 this year (from 612,000 in 2011) and continue to 850,000 in 2013, the report said. However, the nature of the homes being built is likely to differ from that in the past.

""With homebuilders responding to investor demand for housing units suitable for the rental market, multi-family starts will make a strong contribution to the overall rise in starts. Half of all starts are now intended for the rental market, double the level from six years ago,"" said the report.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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