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Originally published Friday, December 23, 2011 at 10:00 PM

Experts see rebound in home prices by 2013

Bloomberg News

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The two-bedroom Denver row house that Kyle and Jennifer Zinth bought in 2005 is a tight fit now that they have an 18-month-old son, Max, and a dog named Beauregard.

They plan to put it up for sale next month, hoping to at least break even so they can buy a larger home.

"My understanding is it's a better time to buy than sell," said Kyle Zinth. "If we can get out of this one without financial harm and get a good deal on the next place, then that's ideal under present market realities."

The Zinths are wading back into a U.S. housing market where prices may fall further under the weight of foreclosures and not rebound until 2013, even as the economy builds momentum and mortgage rates fall to record lows, according to a survey of 109 economists released this week by Seattle-based Zillow.

When values do rise, the gains probably won't match those seen in the years before the bursting of the bubble in 2006.

Prices for resold homes are down 31 percent since the July 2006 peak, based on the S&P/Case-Shiller Index that tracks 20 major metropolitan areas.

Values have increased 3.1 percent since bottoming out in March, though more than a quarter of homeowners with a mortgage are "underwater," or owe more than their property is worth.

"Dirt cheap"

Prices may drop an additional 7 percent, according to Scott Simon, head of the mortgage- and asset-backed securities teams at Pacific Investment Management (Pimco) in Newport Beach, Calif.

Homes are more affordable now than at any time on record, setting the stage for a turnaround, he said.

"The new normal is that, if you can get a mortgage, housing is dirt cheap," Simon said, using the term popularized by his colleagues at the fund manager to describe the extended period of below-average economic growth they forecast after the 2008 financial crisis.

"You're going to look at a graph someday, and it's going to look like somewhere between Jan. 1, 2012, and June 30, 2013, housing bottomed."

U.S. home values probably had their smallest decrease in four years in 2011, according to Zillow, whose survey found that prices may find their floor in late 2012 or early 2013 and will begin rising by 3 percent a year through 2016.

That appreciation is modest compared with the last decade, when double-digit annual increases were common, the Seattle-based provider of real-estate data said.

"Negative equity, unemployment and low consumer confidence remain the key factors delaying a true recovery," said Stan Humphries, Zillow's chief economist.

Elusive recovery

Home prices will fall 1 percent in 2012 and rise 2 percent in 2013, Frank Nothaft, chief economist for mortgage-finance company Freddie Mac, said in a Dec. 14 report.

"A full-fledged recovery in the housing sector will likely elude the U.S. in 2012, but new construction and home sales are expected to be greater than in 2011," he wrote.

Beating 2011 shouldn't be hard.

Sales of new single-family homes this year are on pace to fall to 301,000 from 323,000 in 2010, which was the lowest in Commerce Department data going back to 1963.

While housing starts hit a 19-month high in November, led by a surge in multifamily construction, the annual rate of 685,000 for the month compares with a January 2006 high of 2.27 million.

Revised sales data

Existing-home sales rose to an annualized 4.42 million in November, the highest in 10 months after figures were revised, the National Association of Realtors said this past Wednesday.

The data showed that annual sales were an average of 14 percent lower than previously reported since 2007, magnifying the impact of the downturn.

"Even before the revisions things were bad," said Lawrence Yun, the group's chief economist. "Now they are even worse."

As lenders tightened credit standards, 33 percent of Realtors reported sales being canceled last month because of problems such as mortgage denials or low appraisals. That's up from 9 percent a year earlier.

Americans are taking advantage of low interest rates to refinance rather than buy, according to the Mortgage Bankers Association. Refinancing accounted for 80.7 percent of home-loan applications for the week ending Dec. 16, the most in 13 months, the group reported Wednesday.

New low

The average rate for a 30-year fixed loan fell to 3.91 percent in the week ended Thursday, the lowest in data dating to 1971, from 3.94 percent, Freddie Mac said in a statement. The average 15-year rate matched the previous week's all-time low of 3.21 percent, according to Freddie Mac.

Foreclosure filings, which slowed in 2011 as banks and loan servicers faced investigations over the use of improper documentation to seize homes from delinquent borrowers, are expected to be little changed in 2012, according to RealtyTrac.

A total of 224,394 properties received default, auction or repossession notices in November, down 14 percent from a year earlier, the real-estate data service reported Dec. 15.

Shadow inventory

Owners of more than 14 million homes are in foreclosure, are delinquent on their mortgages or owe more than their houses are worth, creating a shadow inventory that is holding down sales and prices, RealtyTrac Chief Executive James Saccacio said.

Moody's Analytics Inc. expects home prices to drop about 3 percent in 2012 as more foreclosed homes go on sale, said Celia Chen, one of the firm's housing analysts.

By midyear, the distressed share of the market — foreclosures and short sales, in which the lender agrees to a price below the mortgage balance — will begin to shrink and average prices will start to rebound, perhaps as much as 5 percent in 2013, she said.

"By the end of next year, prices will begin to appreciate," Chen said. "The fundamental driver of normal home sales is going to improve because we expect the economy will start generating jobs by the end of next year."

Should a housing recovery occur, it won't be uniform nationwide.

Sales face "bifurcation" as distressed properties in deteriorating condition drive down the overall average while the prices for nondistressed existing and new homes command a premium, Stephen Kim, a homebuilding-industry analyst with Barclays Capital said in a Dec. 5 note to investors.

"We believe this newly established stability in nondistressed home prices is the leading indicator to home- buying sentiment improving in 2012," Kim wrote.

Larry Alexander said he plans to buy and rent out four foreclosed homes next year around Omaha, Neb., where he owns Great Plains Mortgage. Foreclosed three-bedroom homes sell for less than $50,000 and rent for at least $650 a month, he said.

"There are so many deals to be had," Alexander said. "If you're a cash investor, you can usually get them for 60 cents on the dollar."

More than two-thirds of Great Plains' $20 million in mortgage originations this year have been refinancings, because interest rates are so low and because people are reluctant to buy, Alexander said. Most people fear the economy won't recover or politicians will make things worse, he said.

Rent or buy?

Simon's colleague at Pimco, Mark Kiesel, who sold his home in 2006 when he thought the housing market was overheated, plans to continue renting because he expects prices to fall for the next two years.

But for Kyle Zinth in Denver, buying a bigger home has benefits that can't all be measured by returns on investment. A backyard would allow him to avoid putting a leash on Beauregard when the dog goes outside, and a place without common walls will insulate his family from noisy neighbors, he said.

"I've rented before and I've owned before," Zinth said. "And I prefer owning."

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