After three consecutive years of record-low construction levels, the housing recovery now hinges on a return of demand, according to a study released this week by the Joint Center for Housing Studies of Harvard University.

Existing home sales remain depressed while new home sales continue near record lows and elevated vacancies and foreclosures continue to place downward pressure on prices. The report points out, however, that just 10 percent of neighborhoods across the United States account for nearly half of all foreclosures in 2010.

“While the sharp declines in both home prices and interest rates have left homes in many places more affordable than they have been in decades, stubbornly high unemployment and tightened lending standards have limited the ability of many first-time buyers to capitalize on the situation,” says Eric Belsky, managing director of the Joint Center for Housing Studies.

Although the housing industry continues to face challenges, one bright spot is the rental market, according to the study

“Rental housing markets are tightening and may begin to lead a modest recovery in housing construction this year,” says Chris Herbert, research director of the Joint Center for Housing Studies. “But we need sustained employment growth to spur a broader increase in housing demand and a recovery in home sales.”

The report also is optimistic, though, pointing out that the market could turn around quickly as evidenced by the healthy boost in both home sales and prices brought about by the 2010 homebuyer tax credit. “The ingredients for a sustained recovery may be coming together,” adds Herbert. “But it is still not clear when homebuyers will have the urgency to return to the market in sufficient numbers to lift the market in a meaningful way.”

David Crowe, chief economist with the National Association of Homebuilders, also discussed the topic during a residential forecast during a webinar held yesterday. Crowe focused on the economic recovery as it applies to housing.

He says residential construction typically leads the economy out of a recession, but it’s performed worse in this recession than in previous ones. He said growth has not been anywhere near what would typically be expected. Still, Crowe gave some reasons for optimism. Low mortgage rates, as an example, are not likely to rise significantly. He also says house prices have mostly returned to normal levels.

“Low house prices and low interest rates mean affordability is very good,” Crowe says.

He adds that there is also a very low inventory of new homes.

Looking ahead, he expects the market will begin to see some improvement.

“By the end of 2012 I see us back to where we were in mid-2008—not great, but decent,” he says.

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