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Have we hit bottom? Economists: Housing industry looking much brighter in 2011

Source: Reported By Julie Schmit, USA TODAY
The housing industry is poised to gain strength this year after coming off one of its worst years ever in 2010, economic forecasts and new data released Wednesday show.
One cause for optimism: Building permits for new single-family homes rose 5.5% last month, the third consecutive monthly increase and the strongest showing since March, the Commerce Department said.

That sets the stage for more home construction later this year as the economy improves, says Celia Chen, economist at Moody’s Analytics.

“The trend is up,” Chen says.

But it’ll be a slow slog. The previous two years have been the worst on record for home builders in at least 50 years. Nationwide, home prices are down almost 30% from their 2006 peak. A new USA TODAY survey of 44 top economists finds that 48% say average home prices won’t hit bottom until sometime this year, and 27% say it’ll take longer.

The housing market recovery “will be two baby steps forward and one backward,” says Joel Naroff, chief economist at Naroff Economic Advisors.

The theme of slow improvement is likely to be repeated in December’s existing home sales data, to be reported today. A small gain is expected over November, says IHS Global Insight economist Patrick Newport.

He also says that December’s permit numbers indicate that housing construction “may be set to grow again.” But some of December’s jump may have been driven by builders trying to get permits ahead of 2011 building code changes in California, New York and Pennsylvania, the Commerce Department said.

Newport also cautions that home-building numbers “are still really awful.” Housing starts, for example, fell 4.3% in December as cold weather and snow delayed construction. But Newport says other factors will continue to depress housing starts.

Those include low prices on foreclosed homes, which makes it hard for builders to turn profits on new homes, and tight financing for home builders and buyers. What’s more, the recession sharply reduced the rate of household formation, which means that more families are doubling up in homes vs. each getting their own, Newport says.

Moody’s doesn’t see home construction getting back to more historically normal levels until at least 2012, Chen says. USA TODAY’s economist survey indicates that 669,000 new home starts are likely this year, up 15% from 2010.

The key is job creation, says Lawrence Yun, chief economist with the National Association of Realtors. When more people are working, and earning higher incomes, home buying increases. IHS expects the economy to add 2.5 million jobs this year and 2.7 million next year.

“The (housing) market appears to have hit bottom, and now we’re trying to get back to normal,” Yun says.

Posted in Real Estate Sales.