Is the Housing Market Bottom in Sight?

Many challenges lie ahead, but local housing markets could see some big improvement this year.

By SHARE

NEW YORK, N.Y.—When will housing prices hit bottom? That's the nagging question on many Americans' minds five years into the deepest and longest housing recession in decades.

While we'd all like a cut and dry answer—the third quarter of 2012? 2013? The day after never?—it's just not that easy to pin down an exact date when the housing market is supposed to turn the metaphorical corner.

Determining when the market "hits bottom" is a much more nuanced affair, Stan Humphries, chief economist at real estate website Zillow, explained at a conference with the Progressive Policy Institute and Columbia Business School Thursday. Instead of an exact date or even a time range, the market's bottom represents a series of events that set up the real estate industry for recovery.

[See today's best photos.]

"The market bottom is a multi-step affair," Humphries said.

First, home sales have to bottom out, which they did in early 2009 according to Humphries. Then long-horizon buyers such as investors, 2nd home buyers, and retirees move into the market, primarily because they—unlike other types of buyers—are less concerned about near-term price declines. Remember, even though the housing market has seen some decent sales activity this buying season, economists still predict home prices to decline a bit more on the whole, mostly because a big chunk of sales in coming months will be distressed properties.

Although Humphries is relatively optimistic about the prospects for the 2012 housing market—"More buyers are finally going to get off the fence this year and get back into the marketplace," he says—there's still a large portion of would-be buyers who remain gun shy.

"It's an interesting phenomenon," Humphries said. "Despite unprecedented affordability and record low mortgage rates, buyers remain on the sidelines."

Why? A big part of it goes back to figuring out the "bottom of the housing market" and the annoying little fact that no one can really predict when it will occur. For obvious reasons, consumers tend to not want to fork over thousands of dollars for something they know will decline in value, even if it's only in the near term.

[See a collection of political cartoons on the 2012 GOP hopefuls.]

Still, Humphries sees 2012 as an inflection point for the housing market, albeit on a super local level.

"To really understand how the housing recovery is growing, you have to get local [because] recovery is happening at a really local level," he said. "A lot of these markets are probably going to see bottoms this year."

Take for instance Phoenix, one the metro areas hardest hit by the housing bubble and bust. Fast forward to 2012 and somewhere in the neighborhood of 90 percent of ZIP codes are seeing price increases.

While the improvement in Phoenix is definitely a good sign for the housing market, it doesn't mean we're out of the woods yet. Almost a quarter of the nation's homeowners remain underwater on their mortgages, which will continue to cast a long shadow over the housing market and fuel the vicious foreclosure cycle. Unemployment, a key contributing factor when it comes to homeownership and maintaining homeownership, also remains high at 8.2 percent.

[Read: The Coming Drone Revolution: What You Should Know.]

That likely means more home value declines on the national and metro levels to the tune of about 4 percent by the end of 2012, Humphries says, even if various pockets in those areas see price increases. Humphries and other experts see that as a recipe for a ripe and robust buying season, especially among investors.

But for those who continue to wait out "the bottom of the housing market," lower prices aren't their biggest enemy, Humphries says, the specter of rising interest rates are. With rates hovering at historic lows, there's really only one direction they can go and a higher interest rate can cost consumers a lot more over the long term than if they wait for home prices to drop a few thousand dollars more.

mhandley@usnews.com

Twitter: @mmhandley