WASHINGTON — With the economy on the mend, home sales could bounce back to their historical levels by 2012, although the bulging foreclosure pipeline is likely to keep prices in check, economist Mark Zandi of Moody’s Analytics told Realtors holding their annual midyear meeting in the nation’s capital.

Zandi said he expects sales of new and existing homes to grow from between 5.5 million and 6 million this year to between 6 million and 6.5 million next year, and hit about 7 million in 2012.

That would put home sales back on their historic trend line. But Zandi said that when it comes to home prices, "the coast is not quite clear."

With the foreclosure pipeline full — Moody’s estimates that 4.3 million out of approximately 50 milllion first mortgages are in foreclosure or overdue by 90 days or more — Zandi expects further price weakness for the next six to 12 months and no real price growth through 2012.

Although loan modifications could help about half of homeowners facing foreclosure avoid losing their homes, another 9 million homeowners are underwater by more than 20 percent, he said, making them more likely to consider a "strategic default."

Strategic defaults, or defaults by homeowners who are able to make their mortgage payments but choose not, will constitute a fourth wave of foreclosures, Zandi said.

The first wave of foreclosures, in 2006, often involved house flippers who got into trouble when prices stopped rising. Subprime borrowers facing interest-rate resets dominated the second wave in 2007, which was followed in 2008 by foreclosures among the unemployed and borrowers with negative equity.

There are already about 9.5 million vacant homes — about 1.5 million more than would be expected by historical trends — and it could take two years to work off that inventory, Zandi estimated.

That assumes that builders keep putting up homes at a slower-than-usual pace of 600,000 homes a year, while new household formation produces demand for 1.35 million homes a year, a difference of 750,000.

While builders could very well pick up the pace of construction, Zandi expects demand will rise even faster — a view echoed by National Association of Realtors Chief Economist Lawrence Yun.

Yun said that with housing starts so far below historical norms, there’s a chance that there will be housing shortages. Home prices could rise 2 to 3 percent this year and even more steeply after that because of the constraints on supply, he said.

While that might seem like a nice problem to have, Yun said abrupt price appreciation would not be good for businesses because some buyers will be priced out of the market.

Sales of distressed homes are expected to account for between 30 and 40 percent of transactions for the rest of the year, Yun said. But the European debt crisis could lead to additional stress tests for U.S. banks, which would hurt jumbo and second-home lending, he said.

Zandi said the structured finance market, which channeled money into home lending before the financial crisis, remains "completely dormant." Fannie Mae, Freddie Mac and the Federal Housing Administration are standing behind 95 percent of loans, he noted.

"It’s not healthy for our economy to be reliant on the government for mortgage credit," Zandi said. Nor is the rising ratio of federal debt to gross domestic product, which could eventually drive up interest rates and derail his optimistic economic projections, he said.

Zandi expects GDP, which fell 2.5 percent last year — the worst showing since 1933 — should grow by 3 percent this year, 4 percent in 2011, and 5 percent in 2012.

But it may be 2014 before enough jobs are created to make up for the 9 million lost during the financial crisis, he said.

Businesses must create 125,000 a month just to keep up with the growing size of the nation’s work force, he said — a "break-even" pace he expects can be sustained this year. Next year, Zandi expects about 250,000 jobs will be created each month, a figure he said should grow to 300,000 in 2012. 


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