A gradual recovery that pulls consumers back to the housing industry may be in the long-term forecast, but first the industry must bottom out, or so the theory goes. While some economists project that a market rebound is still far off, Freddie Mac chief economist Frank Nothaft says the housing industry could begin its slow road to recovery in the second half of 2007.

“The trough will occur in the first half of the year, and then the second half will be better, but it won't suddenly skyrocket back to the wonderful time in 2005, when we had record levels of single-family construction,” he predicts.

December 2006 saw a seasonally adjusted annual rate of 1.23 million single-family homes under construction, well below December 2005's rate of 1.63 million or December 2004's 1.7 million starts, according to the U.S. Census Bureau.

Freddie Mac projects that trend to continue with 200,000 fewer housing starts in 2007 than there were in 2006. The bulk of that projected drop will be felt in the first half of the year, and Nothaft predicts that home starts will pick up later in the year and leading into 2008.

So, continued focus on selling off inventory backlogs in the opening months of 2007 while cutting back on new-home construction is still in order. Though inventory dipped from a 6.7 months' supply of unsold homes in October to a 6.3 months' supply in November (the last month for which data is available), November's rate was still 28.6 percent higher than November 2005's 4.9 months' housing supply.

Worse, the number of unsold completed new homes is making up more of the inventory mix, now up to 31 percent of the total, according to a report from Wachovia Capital Markets. Completed homes cost up to three times as much as finished lots or unfinished homes to carry, according to Wachovia.

But it's not all doom and gloom for the housing industry. Continued national economic growth in 2007 could lead to income growth for families, according to Nothaft. Freddie Mac projects the opening of about 1.4 million new jobs in the U.S. in 2007, and that will help push family income levels up between 5 percent and 6 percent.

With housing prices being held in check by excess supply, mortgage rates fluctuating little, and income levels increasing, affordability may start improving in 2007.

“With that gradual improvement in affordability, we see a pick up in housing activity,” Nothaft adds.