Mark Zandi, Moody’s Analytics’ chief economist, has seen this movie before.

Last year, he predicted that the housing market would start to at least level off in 2011. The reality this year has been that housing continues to resist recovery in many markets, and some experts are now forecasting a much longer period before housing stops wobbling.

But Zandi is sticking to his guns. “I’m still optimistic” about a quicker recovery, he told builders during an hour-long presentation yesterday that closed the Housing Leadership Summit in Chicago. Zandi expects new and existing home sales to reach their “normal” levels of between 6 million and 6.5 million by 2013. Housing starts will hit around 700,000 this year and rise to 1 million in 2012 and 1.5 million in 2013, he says. He expects home prices to decline by another 3% to 5% this year, be flat next year, and start growing again—possibly by 3% to 4%—in 2013.

He’s bullish for several reasons: improving employment, strong corporate balance sheets, and lessening uncertainties about tax and fiscal policy changes coming out of Washington.

An equally important factor, said Zandi, has been households scaling back their spending to what they can actually afford. Household debt since its peak in 2008 has fallen by $1.1 trillion, and the number of credit cards outstanding is down to 450 million from 600 million at peak. Despite serious problems on the home foreclosure front, delinquencies on all consumer debt are currently at their lowest levels since 1997. “By this time next year, households will have their balance sheets where they want them to be,” said Zandi.

If that happens, buyers might be more disposed to take advantage of what continues to be a period of remarkable affordability in the housing sector. Zandi sees mortgage credit as being “reasonably ample,” but that’s not going to last forever. He doesn’t think, though, that the lowering of conforming loan limits for government-backed mortgages is going to have much impact on overall buyer demand, except in pricier markets on the coasts.

However, buyers aren’t likely to jump into the housing market in droves again until they see more evidence that home prices have stopped falling. What’s still driving those price declines are foreclosures. There are 3.5 million loans, of the 50.5 million outstanding, 90 days or more delinquent. And when an underwater home is typically valued at $50,000 less than the value of the mortgage, it’s not surprising that strategic defaults are now 20% of all defaults.

On the other hand, homes in the early stages of foreclosure (30 to 90 days in arrears) are fast declining. Zandi doesn’t think banks will be in any rush, either, to release the 600,000 or so REO properties on their books. He also believes that housing in most markets is “appropriately valued,” and that pricing of non-distressed homes “is holding up pretty well.”

Nevertheless, there’s still “a tremendous amount” of unsold inventory that needs to be flushed out of the system. Zandi estimates there are 10 million vacant homes for sale or rent that are currently being held off of the market. (In a functioning economy, that number is more like 8.5 million.) However, he questioned how many of these vacant homes are actually sellable. Zandi also pointed out that this inventory overhang is highly concentrated regionally (about 10% of the unsold stuff is in Florida alone).

For those reasons, he believes home builders can start thinking positively again about their production goals, based on Moody’s projections for new-home supply and demand over the next 10 years:

  Current Next decade (per year)
Total supply
Single family
Total demand
HH formations
Second homes
Source: Moody’s Analytics    

John Caulfield is senior editor for BUILDER magazine

Learn more about markets featured in this article: Chicago, IL.