Despite signs of a slowdown in global economic growth, recent single-family housing data suggest the housing recovery is "on track" and is set for "continued gradual healing," according to a monthly economic outlook released this week by Fannie Mae’s Economic & Strategic Research Group.

There are some favorable signs that a housing recovery is under way, Fannie Mae said. Homebuilder confidence reached its highest level in five years in May. Mortgage rates are expected to remain around their current lows through this year to average 3.8 percent for a 30-year fixed-rate mortgage.

Home prices are showing signs of finding a floor thanks to fewer distressed sales, though Fannie Mae doesn’t expect them to reach a bottom until 2013. The mortgage giant expects prices to decline another 1.2 percent this year before regaining that same percentage in 2013.

Year to date through April, existing-home sales, new-home sales and single-family housing starts were above the levels posted during the same period last year, and Fannie Mae predicts each will rise 7.6 percent, 13.5 percent and 17.4 percent, respectively, in 2012 compared to 2011.

Despite these encouraging indicators, the housing market continues to face challenges, Fannie Mae said. These include drops in purchase mortgage applications and contract signings for existing homes in April, a persistently high share of loans in foreclosure, damaged household balance sheets, sluggish income growth, and historically tight lending standards.

The latter "help explain why record-high affordability conditions stemming from declining mortgage rates and home prices have not substantially boosted home sales. The tight relationship between affordability and home sales observed prior to the year 2000 has clearly broken down," the report said.

A spring lull in hiring and the European sovereign debt crisis are also weighing on the market. Though still gaining, employment growth has slowed each of the last five months, and in May the jobless rate rose to 8.2 percent, adding just 69,000 jobs.

"It is now less convincing to frame the weakness as just a payback to warm winter weather. Rather, it appears increasingly likely that labor market fundamentals have deteriorated amid the slowdown in the global economy and the intensified European sovereign debt crisis, which likely made businesses more cautious," the report said.

"In his testimony before Congress on the economic outlook in early June, Fed Chairman Ben Bernanke noted weather-related payback and seasonal adjustment issues, but reiterated his theory delivered earlier this year that strong gains in hiring late last year and early this year were ‘catchup hiring.’ That is, businesses may have aggressively laid off workers earlier in the cycle, prompting them to catch up later on — a process that has largely been completed."

This is the third straight year to see a spring slowdown in economic activity, said Doug Duncan, Fannie Mae’s chief economist, in a statement.

"Our view is that the underlying resilience of the economy and of consumers, in particular, that has been demonstrated during the past couple of years will persist," he said.

"However, the magnitude of the uncertainties surrounding the European debt crisis and our fiscal condition here in the U.S. implies that the risks to the outlook are clearly tilted to the downside."

Nevertheless, the slowdown in the labor market and uncertainty about European solvency "should not derail the housing recovery if hiring picks up again as expected," the report said.  

Fannie Mae anticipates an average 8.1 percent unemployment rate this year, followed by an average 7.8 percent rate in 2013. The mortgage giant also forecasts a moderate 2.2 percent increase in gross domestic product for all of 2012, up from 1.6 percent in 2011.

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