Predicting the housing market's fortunes in 2012 on the eve of the spring selling season is like guessing which direction an amoeba in a petri dish will move.
To be sure, most observers aren't anticipating soaring growth. Strict mortgage lending and wary consumers still challenge the market. The thrum of foreclosures could rise this year and keep a lid on home prices. State attorneys general face a Friday deadline this week to decide whether to join a potential $25 billion settlement with five big banks over alleged foreclosure abuses.
But some experts point to reasons for cautious optimism, including dwindling housing inventory, greater housing affordability and last year's creation of 1.6 million jobs.
"The signals are a little hard to extrapolate, but ultimately by the end of this year we should see the housing market on more solid footing," said Celia Chen, senior housing economist with Moody's Analytics. "So an improvement — but off of very, very weak activity.
That case was driven home this week in the latest Standard & Poor's Case-Shiller home price report, which said that the composite price in its 20-city index dropped an average of 3.7% in November from a year earlier.
U.S. home prices are expected to be flat this year after a nearly 2% drop last year, according to a survey of 109 economists and real estate experts by housing site Zillow (NASDAQ:Z).
"It's a murky picture, but my expectations are for some modest improvement in the spring and continuing in 2012," said David Crowe, chief economist for the National Association of Home Builders. The organization predicts that home sales will rise 18% this year after falling to the lowest on record in 2011. Conflicting Indicators "Sold" signs may be in short supply on front lawns, but contradictory signs in housing data abound, keeping analysts cautious.
• Mixed data. Existing-home sales rose 3.6% to a seasonally adjusted annual rate of 4.6 million units in December from a year earlier, according to the National Association of Realtors. And for-sale housing inventory of nearly 2.4 million units in December marked the lowest amount since March 2005.
NAR Chief Economist Lawrence Yun says that suggests price stabilization or growth is ahead for many markets. Pending sales of existing homes, however, fell 3.5% in December from a month earlier.
When 2012 is tallied, NAR projects existing-home sales will hit 4.4 million units, up 4.2% from 2011, which saw paltry 1.7% growth.
• Tight credit. NAR's Housing Affordability Index is at its most favorable level since the 1970s, spokesman Walter Molony says.
The index measures mortgage rates, home prices, income and other data to assess a family's ability to qualify for lending. Yet in December, a third of Realtors saw contract failures, up from 9% a year earlier. NAR blamed rejected mortgage applications and appraisals coming in below the agreed-upon price.
Valuation rule changes in 2009 led to altered appraisal practices, Molony notes. For one thing, lenders generally want to compare a pending sale against eight to 10 nearby transactions — NAR maintains today they may include foreclosure sales that aren't put into context.
"If we simply return to the normal credit standards, verifying income and looking at the creditworthiness of an individual to stay in a property long term, we think sales will be 15% to 20% above where they are," Molony said. "There are more people trying to buy homes than are succeeding today.
• Construction starts. Builder confidence rose a fourth month straight in January, according to the NAHB/Wells Fargo Housing Opportunity Index. And new-home inventory hit a record-low 157,000 units in December.
Builders broke ground on enough single-family homes in December to boost the annual rate to 470,000, the highest since April 2010, according to the Commerce Department.
Those are signs of optimism after last year's 7.3% drop in new-home sales. But NAHB's Remodeling Market Index reached a five-year high in December, indicating owners might be planning to stay in their homes rather than move. Some,though, could be fixing up in anticipation of selling at a better time.
• Foreclosure uncertainty. Foreclosure activity fell 34% in 2011, reports Irvine, Calif.-based RealtyTrac. But the housing data firm anticipates that foreclosures will pick up once banks and states reach a settlement over alleged foreclosure irregularities.
Still, there's upside beyond the short-term pain of continued price compression, says Daren Blomquist, a vice president at the firm.
"In the long term, once the backlog of foreclosure inventory has been cleared, housing markets can truly bottom and move into full recovery," he said.
Critical Confidence Other developments could have a say over how the housing market performs this year. Those include success or failure of potential government plans to further help distressed homeowners refinance and to facilitate conversion of foreclosures into rentals. President Obama outlined this week how streamlined refinancing might work.
But consumer confidence plays a crucial role, too. In January it fell slightly from December, reflecting less optimism about income prospects and business conditions, according to the Conference Board's Consumer Confidence Index.
A continued decline over the next few months could stymie any hope for a nascent recovery in 2012.
"Come April, if sales activity doesn't pick up, it could take the edge off a burgeoning turnaround," Chen said. "Buyers might say, 'If no one is buying now, why am I? Maybe I'll just wait.'"