With high foreclosure rates and weak consumer confidence continuing to create an imbalance between housing supply and demand, Fitch Ratings recently downwardly revised its housing outlook for 2010, pushing a meaningful recovery well into 2011. Moreover, any recovery will likely be more tempered than in past cycles, Robert Curran, Fitch's managing director for corporate finance, told listeners during a real estate outlook conference call on Thursday.

Curran said expected housing starts for the year to come in relatively flat compared to 2009 levels at 570,000, with single-family starts posting a modest growth of 4.5% to 460,000. However, he currently forecasted a 9.9% drop in new home sales for 2010 to 337,000 and a 4.1% drop in existing home sales to 4.9 million. Home prices also were likely to slide another 10% by the end of the year, he said.

But by 2011, the housing market should be showing signs of improvement, Curran said. He expected new home sales to rebound 14.8% and existing home sales by 6.0% from 2010 to 2011, contributing to an uptick in single-family starts of 19.6%.

"Although the percentage increases for next year may seem quite robust, they are much more moderate than what has historically been realized during the early stages of the five housing recessions since the mid-1960s," he explained. "For example, single-family housing starts averaged a 48% gain during the first year of an up cycle; single-family new-home sales averaged a 39% increase in the first 12 months of a recovery."

Although Curran's modest outlook for housing improvement was reflective of the market's fragility, he said additional economic changes could further delay recovery.

"If mortgage rates should meaningfully rise in 2011 or credit terms tighten further, then our housing forecast could turn more pessimistic for next year. And of course if the economy, now in recovery, were to backslide back into recession, rather than a housing recovery, another leg down would be anticipated," Curran said.

Besides an uncertain employment pictures, which was affecting consumer confidence, Curran said the biggest obstacle to housing's recovery was an overabundance of homes on the market, largely due to foreclosure activity.

Curran estimated that there were between 1.5 million and 2.0 million excess homes on the market, excluding so-called shadow inventory, which would include foreclosures not yet put up for sale and homes that owners want to sell but are delaying putting on the market until they see more stability. Citing numbers from John Burns Real Estate Consulting, Curran said there could be as many as 4.7 million homes in shadow inventory.

Although some of the government-sponsored foreclosure mitigation programs, such as the Home Affordable Modification Program (HAMP), have experienced declines in the pace of loan modification activity, Curran said non-HAMP modifications are not only increasing but showing improving success rates in terms of redefaults. Fewer defaults will help control inventory.

Although high inventory levels relative to current sales pace pose a challenge today, Curran said the situation could reverse quickly in a recovery scenario, given the disconnect between household formations and construction activity:

"There's been well below average new single-family home construction pattern for the past few years. This follows above-average construction for three to four years prior to that. Household formations have been below the one million-plus norm for the past three years. A major reason for this has been the economy. When the economy, especially job formation, ramps up, we expect household formations will jump and that will lead to some increasing demand for housing. In the interim, if more land does not enter the development process, there could be shortages of newly built homes at least in select markets in better locations."