Story of the year: What’s the new normal?

The most popular question since the mortgage meltdown and subsequent dive in home prices has changed in the past 12 months. It has evolved from “where’s the bottom?” to “what’s the new normal?”

The reasons for the change vary but they lie somewhere between a general public acceptance that double-digit appreciation is a thing of the past and the inability of economists and analysts to accurately predict supply and demand.

Stabilization should come on the heels of the true bottom. The unrivaled number of foreclosures and shadow-inventory homes, however, has simply thrown even the most accurate prognosticators off their mark.

For example, six months ago, Frank Nothaft, chief economist at Freddie Mac, said that he expected the 30-year, fixed-rate mortgage to trend up to 5.25 percent by the end of the year and for home sales to rise 5 percent.

“National home price indices are close to a bottom and prices are likely to bottom sometime this year,” Nothaft said.

Home sales will not end up that healthy in 2011 and long-term fixed-rate mortgages are a lot closer to 4 percent than 5.25. The bottom is probably still ahead of us with most housing officials calling for the markets to stabilize in 2012.

One of the biggest believers in that timeframe is Asieh Mansour, senior managing director of global research for the CB Richard Ellis Group, who expects U.S. home prices to stabilize in 2012 and improve after 2013.

“A modest economic recovery and a pick-up in jobs, combined with record home affordability, should increase demand for housing going forward,” Mansour wrote.

Lawrence Yun, chief economist of the National Association of Realtors, projected a gradual increase in home prices – a 2 percent increase in 2012; a 3 percent price gain in 2013 and a 4 percent increase in 2014.

“So, we will be at least three years before things look more like normal,” Yun said. “Of course, normal depends upon when you bought. I’m using normal as activity in the middle of 2005. If you bought 20 years ago or at the recent height of the market your understanding of normal might be quite different.”

Existing-home sales are forecast to increase about 1 percent in 2011, and then rise another 4 to 5 percent in 2012, NAR predicts. For the year, existing home sales will be just under five million homes, an improvement over last year, but a far cry from the mid-2000s when annual sales topped seven million homes.

“Tight mortgage credit conditions have been holding back home buyers all year, and consumer confidence has been shaky recently,” Yun said. “Nonetheless, there is a sizeable pent-up demand based on population growth, employment levels and a doubling-up phenomenon that can’t continue indefinitely. This demand could quickly stimulate the market when conditions improve.”

Mansour concurs that some pent-up demand is just around the corner. She also sees prices bottoming out next year based on a variety of factors including rising rents, reliable incomes, and the after-tax costs of homeownership.

“As the economy recovers, demand for housing should improve,” she said. “At the same time, there exists significant pent-up demand for housing. Such a recovery in household formations beginning in 2012 should boost demand for both rental and owner-occupied housing.

“This, however, assumes no major change to the structure and availability of housing finance in the U.S. nor any change in the tax benefits associated with homeownership.”

Not all housing financing officials say they are ready to discuss “the new norm” or pinpoint a timeframe for stabilization. Richard Peach, senior vice president at the Federal Reserve Board of New York, said he is concerned about a sizeable level of shadow inventory that will result in rising foreclosures. He offered his own proposal to accelerate stabilization while absorbing inventory.

“My idea is to allocate certificates to 2.5 million service members who served in Afghanistan and Iraq that could be used as a down payment on a foreclosed home in the Fannie or Freddie portfolio,” Peach said.

So, have we hit bottom?

“Much of the excesses have already been wrung out of the housing market,” Mansour wrote. “A modest economic recovery and a pick-up in jobs, combined with record home affordability, should increase demand for housing going forward.”

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Borders Books, Diesel eBook Store, and Google Editions. It mirrors a recent article by CNN on the benefits of the country, including increased rental possibilities.