Getting the Big Picture on the Housing Market

What does 2012 hold for the U.S. housing market? Here's a quick look at the issues to see where we're headed.

In its most recent meeting, the Federal Open Market Committee (FOMC) of the Federal Reserve decided once again to leave its target interest rate unchanged in the range of zero to 0.25 percent. That rate has not changed since December 2008, and it looks as though there will be no movement for some time to come. In its statement, the FOMC said that in order to support a stronger economic recovery, "The Committee expects to maintain a highly accommodative stance for monetary policy," as it "anticipates that economic conditions...are likely to warrant exceptionally low levels for the federal funds rate, at least through late 2014." Low Fed rates, in addition to the Fed's program of buying mortgage-backed bonds, are likely to keep mortgage interest rates near historically-low averages for the whole of 2012, although rates could end the year higher than they started as the economy improves.

Although the number of new foreclosures fell 40 percent in 2011, it wasn't because there were actually fewer homeowners going into default. This decrease results from the "robo-signing" scandal and the resulting backup in processing.

"Nationally, foreclosure pipelines remain at historic highs, but they are clearing at very different rates depending upon state procedures," said Herb Blecher of LPS Applied Analytics.

And, as of the end of 2011, most banks had resumed full-scale processing of foreclosures, with a jump in new foreclosure activity in the last quarter of the year.

"The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems," RealtyTrac's CEO James Saccacio told CNBC in September. "It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process."

It appears very likely that that the number of foreclosures will rise significantly in 2012.

There is not much hope for a recovery in home prices before all the foreclosure inventory is worked through. The most recent Reuters poll of economists found that most do not expect to see any real movement in home prices this year. States in the hardest hit areas of the country are especially likely to see further drops in housing values as non-foreclosure properties for sale must compete with so many discounted distressed homes. For example, in Nevada, according to RealtyTrac, distressed properties made up 57 percent of all home sales in the third quarter of 2011, and they sold for only 20 percent less than traditional home sales. The national average for foreclosure discounts was much higher at 34 percent.

With interest rates remaining low and a large stock of foreclosures helping to keep home prices low, 2012 will be a buyers' market. Yet mortgage credit remains tight and the uncertainty of the employment scene will likely keep home sales from blossoming. A recent forecast from mortgage giant Freddie Mac predicted that sales of existing homes will increase between 2 percent and 5 percent this year.

Overall, the theme for 2012's housing market should be one of progress. It might be incremental and it might be the progress of finally bottoming out, but things should be somewhat better by the end of the year than at the beginning.