Top 5 Predictions for the Housing Market in 2013

What's in and what's out for the housing market in 2013.

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What a difference a year makes.

After slogging through years of crippling property value declines and foreclosures, the housing market finally gained traction in 2012 as strengthening home prices, better sales, and more construction propelled the sector to be one of the only bright spots in the economy.

But there's still a long way to go when it comes to the return of a "normal" housing market, says Trulia's Chief Economist Jed Kolko. Here's what he said we can expect from the housing market in 2013.

It's all about inventory: In 2012, the big question was when home prices would hit bottom. Now that every major home price index shows asking and sales prices rising 2012, the industry has been faced with a different question: When will for-sale inventory hit bottom?

The supply of homes for sale across the nation has fallen 43 percent, which has fueled bidding wars and helped to buoy home prices in competitive housing markets. But for the housing market to fully recover, inventory needs to expand again, Kolko says.

[Read: Low Housing Inventory Good News for Jobs]

"The sharp decline in inventory was a necessary correction to the over-supply of homes after the bubble, but now inventory is below normal levels and holding back sales, particularly in California and the rest of the West," he wrote in a recent post.

The good news is rising home prices should motivate would-be sellers to put their homes on the market and it also stimulates new construction, both of which will expand inventory, boost sales, and give house hunters more to choose from.

A makeover for mortgage rules: If 2012 was about rectifying past evils committed by the mortgage industry, 2013 is about making sure they never happen again. In February 2012, five of the nation's largest banks agreed to set aside $25 billion to fund loan modifications, foreclosure prevention programs, and compensation to homeowners wronged in the robo-signing scandal.

The real-life benefits of the settlement have been much debated--wrongfully foreclosed-upon consumers have received very little money for their troubles, and some budget-strapped states have diverted settlement funds intended for housing programs to other uses.

[Read: 6 Reasons You Shouldn't Refinance]

In 2013, the Consumer Financial Protection Bureau plans to announce new mortgage rules designed to explicitly define which mortgages can be judged to be beyond a borrower's ability to repay and thus would have legal and financial implications for the lender that wrote the loan.

"These rules will need to strike a delicate balance between protecting consumers from the types of high-risk loans that contributed to the last crisis and giving lenders the incentive to expand mortgage credit," Kolko says.

The closing affordability window: The story throughout 2012 centered around how affordable owning a home had become relative to renting, even in the most high-end markets such as Honolulu and New York City.

But as evidence mounts that prices have hit bottom and are on an upward trajectory, the housing affordability window may be closing.

[Read: Fiscal Cliff Shouldn't Scare Homeowners, But 2013 Should]

"Now that home prices are rising faster than rents in most of the largest markets, the affordability tide is starting to turn," Kolko says. "Rising mortgage rates, which consumers and forecasters expect next year as the economy strengthens, would also reduce affordability in 2013."

Mortgage interest deduction on the chopping block: Long held sacred by taxpayers and politicians, the popular mortgage interest deduction is now on the table in fiscal cliff negotiations as lawmakers puzzle over how to reduce the nation's ballooning deficits.

The mortgage interest deduction costs the government about $100 billion in revenue annually, and both Democrats and Republicans are considering capping deduction amounts or converting the deduction into a credit.

Cutting or reducing the benefits could help shrink the federal deficit and prevent the country from plunging over the recession-inducing fiscal cliff, but it also makes home-ownership more expensive and home values in high-cost housing markets could take a hit, Kolko says.

Housing policy goes local: Although there's no shortage of national housing issues--the future of government mortgage giants Fannie Mae and Freddie Mac, expanding refinancing initiatives--many critical housing issues can only be addressed at the local level, Kolko says.

That means city and state officials are going to have to step up to the plate when it comes to the unique challenges their local housing market faces, but it also means the housing market is recovering.

"It's a sign of recovery and return to normalcy that the national housing crisis is becoming a range of diverse, localized housing challenges," Kolko says.

In the end, the new local focus might be just what the housing market needs after months of gridlock in Washington have held up important policy decisions that affect millions of Americans.

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  • Meg Handley is a reporter for U.S. News & World Report. You can follow her on Twitter or reach her at mhandley@usnews.com.