For home builders who have lived through the worst years for housing since World War II, Moody's Analytics chief economist Mark Zandi is offering both balm and hope.

In 2012, there will be 1.7 million new housing units, he told the group of builders at Hanley Wood's Housing Leadership Summit on Wednesday in Chicago.

"Wow!" came from a voice in the crowd. Applause followed.

Zandi did couch his forecasts with caveats.

"These are optimistic forecasts that include some risks that would derail it," Zandi said at the beginning of his presentation.

Jobs need to come back, foreclosures need to be worked through, credit for buyers must be available, and the national debt needs to be tamed. Still, he said he is fairly confident that all will happen.

Some forecast highlights:

  • Gross Domestic Product will grow 3% in 2010, 4% in 2011, and 5% in 2012.
  • Job numbers will begin to rebound, recovering the 9 million lost by 2013.
  • Consequently, unemployment will begin to go down to 7% in 2012 to 5.5% in 2014.
  • Housing demand, which peaked at 2.1 million new housing units in 2005 and bottomed in 2009 at 550,000 should climb to between 650,000 and 700,000 in 2010, get close to 1 million in 2011, and then hit 1.7 million in 2012.
  • On a less positive note, Zandi said he expects home prices to fall by about another 10% during the year because of continuing foreclosures and short sales.

As evidence that jobs will recover, Zandi offered a chart that showed a strong correlation between corporate profits and job growth, with job growth mirroring profits but lagging by six to 12 months.
Zandi said business balance sheets are in good shape. They've pushed debt loads down and have growing cash on hand. "It's not a question of whether they can expand, but on whether they will expand," he said.

"American businesses that survived the great recession are highly competitive," he added later. "This time next year, every sector [of the economy] will be growing except for state and local government."

Zandi also said there is still a surfeit of houses on the market that need to be worked through. There are 10 million vacant homes in the country. A normal number would be 8.5 million, leaving a balance of 1.5 million. He estimates it will take about two years for that number to normalize.

He's assuming a true demand of 1.35 million homes a year, with 800,000 coming from new household formation, 350,000 from obsolete houses dropping out of the market, and a demand for 200,000 second homes.

Zandi said he thinks the country is about two-thirds of the way done working through foreclosures, having worked through three rounds so far: the speculators walking, the adjustable-rate mortgage reset, and foreclosures related to unemployment and under-employment combined with negative equity. The fourth round, which is yet to come, will be home owners who can afford their mortgage but choose to to default on their loans because their homes have lost so much of their value.

"Strategic default will rise," he said.

Two other situations that could stall housing recovery are the lack of private lending money for mortgages and unchecked rising federal debt.

Government-backed mortgage loans are not likely to go away, but the industry needs the return of private mortgage lending to the market as well, he said.

And the growing national debt must be tamed, too, or interest rates will begin to rise, and, eventually, the country could find itself in the same situation as Greece by 2020 when the country's debt to GDP could be 85%.

"If we don't figure that out by 2012, my forecast will be dead wrong," said Zandi.

The United States has managed to work its way out from under high debt before, "and we have always risen to the occasion," he said. "History suggests that we are up to the task."

He predicted it might be dealt with by decreasing entitlements such as Medicare. A national sales tax is another potential solution as is limiting income tax deductions to no more than 10% or 20% of tax liabilities. That could include limiting or excluding the deduction for mortgage interest.

That suggestion was met with silence from the audience.

See related story on housing recovery.