A new analysis from the senior economist at CoreLogic makes the case that declining household formation, vacant REOs and the shadow inventory of defaults and foreclosures in process together have created an oversupply of 1.1 million homes that is negatively impacting prices and will continue to do so for years-as long as it takes to reduce excess supply to levels that will not impact local values.

“Excess supply is important because it has implications for residential investment and therefore heavily impacts economic growth and home prices,” said CoreLogic’s Sam Khater in The MarketPulse, a new newsletter published by the data provider.

Khater argues that the net increase in housing units increased by an annualized 1.64 percent rate during the last five decades while household growth slowed from 1.54 percent to only 1 percent during the 2000s, and reached its rock bottom in 2008 and 2009 when household growth only averaged 0.5 percent. The decline reflected several factors: more women in the workforce, delayed marriage, lower formation rates for younger households and the recession.

Given the net increase in the supply and household growth between April 1, 2010 and November 2011, Khater estimates that the excess supply was roughly between 1.0 and 1.1 million units as of November 2011. Projections of roughly 600,000 net new housing units annually and an REO supply of 400,000 units a year will exacerbate the gap between supply and demand.

“It will take many years for the excess supply to be removed assuming no large policy intervention and the economy continues to grow slowly,” said Khater. “A large caveat to this estimate is the potential for policy intervention because, absent the REO supply, the excess supply would rapidly decline.”

In some markets with high foreclosure saturation rates, foreclosure inventories will cause temporarily price swings as inventories rise and fall, but even in these cities, in the long run, local economies will be the key.

That’s how Ingo Winzer sees the year ahead. In 1990 Winzer created Local Market Monitor because there wasn’t anything like it and developed of the National Review of Real Estate Markets, which analyzed conditions in 100 US Markets using such economic data as home values, employment growth, and population growth. More recently he created Equilibrium Home Prices, which have proved valuable in assessing real estate market risk during the last two economic cycles. He’s more interested in what makes local markets tick than broad national forecasts that may be irrelevant to local professionals, consumers and investors.

“The evidence is now pretty clear that a sustained economic recovery is underway, although housing markets won’t feel much benefit until next year. Consumers are in no particular hurry to buy a house because they don’t see home prices going up. Homeowners - as opposed to investors - would rather wait to pay a higher price than admit to their friends that they bought too soon. NO market has yet seen an increase in prices,” Winzer said in his January economic outlook.

“Local price increases of 6 percent are going to be difficult, but 3 to 4 percent are more likely. Some markets, like Atlanta, that are struggling with employment are going to have a hard time while others will do markedly better,” he told Real Estate Economy Watch.

Local Market Monitor is popular with investors who rent out their holdings because of its local data and forecasts on rents. Noting that more people today want to rent than buy, Winzer believes that many retirement and second home markets that have been flooded with foreclosures are going to take a long time–ten years or more-for prices to recover.

“In other markets where investors are active like Miami it’s not so bad because there is great demand,” he said.

Housing markets are going to continue to improve with job growth, even at just 2 percent a year, and economic growth will determine rental increases as well as home values. Overall rents are going to reflect population flows. “In a recession people tend to sit still. When things pick up, people are more willing to move to where there are jobs,” he said.

For long term investors, however, projecting rental cash flow ten or twenty years down the road is difficult even at the local level because of the sensitivity of rents to local economic conditions.

“My advice to the long term investor is to reduce risk by buying a more expensive property in a desirable neighborhood where you will be able to charge a premium rent. In lower cost properties, rents may become comparable to the monthly costs of owning a home. Renters in a lower cost property are more likely to buy than those in a higher cost property,” he advised.

However, though national prices will be flat, some 40 percent of the top 50 markets it tracks will stabilize in 2012, forecast Clear Capital, a premium provider of data and solutions for real estate asset valuation and risk assessment for large financial services companies.

Clear Capital today reported a 2.1 percent year-over-year decrease in 2011 that was bolstered by a stabilizing of prices in the latter half of the year and decreasing REO saturation.

“Overall, 2011 was a relatively quiet year for U.S. home prices compared to the last five years,” said Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital. “With national prices down a little more than two percent for the year and sitting at their lowest point since 2001, our projections show that the current balance the market has found will continue through 2012.

“However, individual markets reacting to their local economic drivers exhibit a wide range of performance levels,” added Dr. Villacorta. “Although the national numbers suggest markets are flat, when looking at individual metro markets it turns out only 24 percent of them showed signs of stabilization in 2011, while the others are still moving more dramatically higher or lower. What’s most interesting is that the lower segments of appreciating markets are driving much of the current price growth. In places like Florida, which have historically been hard hit, we are now seeing considerable activity in lower-end properties as demand continues to heat up.”

U.S. prices declined -0.4 percent in December on a quarter-over-quarter basis, showing the markets giving back some of the gains of the summer buying season. This is the first cooling off after six monthly reports showing minimal quarterly gains. In fact, the most recent six months of the year (June - December) saw national home prices flat at -0.1 percent.

While these national quarterly numbers for December fell slightly, half of the major markets covered saw quarterly gains. Dayton, OH checked in at the top of highest quarterly performers with a gain of 5.0%. On the downside, Atlanta, GA showed consistent weakness as December’s lowest performing major market with a loss of -8.4 percent quarter-over-quarter.

In addition to the relatively flat home price performance, national REO saturation rates at the end of 2011 reached a new yearly low at 24.8 percent. REO saturation was volatile early in 2011, and showed consistent declines and stability toward the latter half of the year.

On the national level, 2012 is expected to play out much like the last half of 2011, with a very subtle price change. A minimal decline in the beginning of the year is expected to turn into a meager gain by year’s end. At a more granular level, half of the 50 major metro markets are expected to post gains for the year, and individual metros will experience the full gamut of price movement, from double-digit growth to double-digit drops.

Double digit volatility can be seen with the two strongest markets, including Orlando with a healthy price increase of 11.7 percent, and Bakersfield close behind with a projected 11.1 percent increase. The deepest drops come from Atlanta with an expected drop of -14.4 percent, and Los Angeles with a predicted drop of -10.3 percent.

Florida markets are expected to extend their impressive 2011 performances into 2012. Miami and Tampa are projected to be among the five highest performing metros with 8.8 percent and 7.4 percent growth, respectively, and Jacksonville is forecasted to gain 4.3 percent, placing it at a respectable eighth among the top metro markets. The exceptional growth in these markets can be a result of several factors, including being hit especially hard in the downturn. While fighting back, they remain significantly off their highs of 2006. Other factors in play in these markets include large increases in the values of their lower priced homes (near double-digits for all markets) when compared to higher priced segments of the market, and a high percentage of all cash transactions (51.8 percent) when compared to other metros. This indicates a high degree of investor activity as they look for bargains in the region, driving up demand.

Although the range of movement for U.S. prices stabilized through 2011, prices have settled at the lowest level since early 2001. The forecast for 2012 shows home prices starting with a dip in the first quarter, improving in the spring and summer buying season, and continuing to climb to 0.2 percent overall growth for 2012. Individual markets reacting to their local economic conditions continued to exhibit a wide range of performance levels in 2011, with only 12 of the top 50 metro markets (24 percent), returning year-over-year price movement that can be considered stable - price swings of less than 2.5 percentage points. This will continue into 2012, with only 40 percent being considered stable.

Home prices will end 2011 4.1 percent below a year ago for the second year in a row, as measured by the Federal Housing Finance Administration Home Price Index. Prices will lose a total of 8.2 percent over two years running but here is more bad news to come, according to Fannie Mae’s economists.

Fannie’s experts predict 2012 prices won’t be much better, falling an additional 2 percent during the first quarter and ending with a 0.89 percent year-over-year decline before home prices finally stabilize, turn the corner and slowly begin to improve the following year. They see prices increasing 2 percent in 2013.

The sour note on prices reflects recent price declines recorded by S&P/Case-Shiller and the CoreLogic house price index. “The recent decline in prices was mainly driven by distressed sales, as prices were up when distressed sales are excluded,” the economists said.

“Foreclosure activity seems likely to pick up as process issues are resolved, which should result in more foreclosure completions in 2012 (see Big Banks Created Foreclosure Boom). The Mortgage Bankers Association National Delinquency Survey showed that, after declining for three consecutive quarters, the foreclosure rate rose in the third quarter of this year. Job security will remain an obstacle to home purchases. If the European debt crisis deepens, it is likely that lending standards will be tightened further and mortgage spreads could widen substantially,” the Fannie Mae economists said.

“Home prices stabilized in the third quarter. However, they are poised to weaken in coming quarters, reflecting the winter season, an expected slowdown in economic activity, and a potential increase in distressed sales,” they said.

Are the structural changes that are reshaping Florida’s real estate markets a bellwether for the nation as a whole?

Jack McCabe, the outspoken Deerfield Beach, FL economist who foresaw the last decade’s real estate boom and bust now has a dire scenario for the nation that’s based on Florida’s experience.

“We are headed to a rental society and a slow- to no-growth economy unless the housing market, the foundation of American spending and a major part of U.S. gross domestic product, is revived,” he wrote in an October column in the Sarasota Herald-Tribune titled “The American Dream Recovery Program: a working solution that puts the American people first.”

In an interview with Real Estate Economy Watch, McCabe outlined the Florida trends that are changing the very nature of homeownership, and the fabric of community life in the state.

“Florida is becoming a different place to live. There is a big paradigm shift in how homeownership is viewed,” he said.

Foreclosures are still flooding Florida’s markets. The state’s judicial system has some 371,009 open foreclosure cases. Another 60,000 or so are in default. There are some 1.24 million potential foreclosures and short sales, McCabe estimates. The percentage of homeowners has dropped more in the last 10 years than any time in history.

McCabe advocates a program of systematic modifications beginning with principal write downs based on re-appraisals for current market value, a new tax credit for new homes and revived purchases of mortgage backed securities by Fannie and Freddie to keep families in their homes and foreclosures off the market. Without these steps, he believes, the transition of Florida communities from ownership to rental will come even faster.

Meanwhile, demand from the state’s traditional source of second home owners is drying up. Many of today’s retirees are thousands of dollars in debt on their home, can’t buy a retirement home, don’t want to tap the nest egg and they can’t move to Florida. So they just go down to Florida for a few months and rent, he said. Resort and retirement communities are transitioning from owner/occupant to rental.

In parts of Florida, foreign buyers are now a major part of the market. Some 80 percent of sales in Miami/Dade are to foreign nationals and over 70 percent are cash transactions. In other parts of the state, Canadians and Brits are major buyers. Properties are marketed abroad and McCabe knows of several South Florida condo developments where buyers must pay incrementally as the projects are built, foregoing the need for financing. “These are designed from the outset for foreign ownership,” he said.

“What’s happening in Florida’s retirement market is the tip of the iceberg. It’s a bellwether and we are already seeing the changes underway,” said McCabe, pointing to changing attitudes towards homeownership, especially among young people. “Young people are viewing homeownership negatively compared to other investments.”

However, McCabe is not giving up. “We’ve bailed out the banks, bailed out the automakers, bailed out the airlines, and in the past many other businesses considered important to the American economy,” he said in his Sarasota column.

“The American Dream Recovery Program is a working solution that puts the American people first. ”

However, on one front there is consensus: rents will rise significantly.

On average, Americans expect home rental prices to increase by 3.2 percent over the next year,. Some 41 percent said rents will increase next year, 48 percent expect rents to stay the same and only 6 percent expect them to fall. The November numbers showed a slight retreat from October, when 43 expected rents to rise and 47 expected them to stay the same.

Consumer expectations for next year exceed the current level of rent increases. The average monthly rent for all categories, including apartments and single-family homes, was $846 nationwide in the third quarter, up 2.5 percent from the same period a year earlier, according to Local Market Monitor. Reis puts the third quarter increases at 2.3 percent year-over-year in the 80 plus markets it tracks. The National Association of Realtors forecasts multifamily rents to rise 3.5 percent next year, virtually what consumers expect.

Rising rents impact the homeownership markets in two ways. Monthly mortgage payments on the median priced home-including taxes and insurance-are increasingly falling below average rent levels. In 15 cities today it is less expensive to rent than to buy, according to the Wall Street Journal. Higher rents also make investment purchases of residential properties more attractive. Increasingly, investors are buying to rent out properties for extended periods of time rather than selling.

Consumer home price expectations changed slightly in November, moving from negative to positive territory for the first time in six months, with respondents expecting home prices to increase by 0.2 percent over the next year.

“Though their home price expectations have become slightly positive, consumers remain concerned about the direction of the economy and continue to view their household finances as being relatively flat,” said Doug Duncan, vice president and chief economist of Fannie Mae. “Most Americans expect no improvement in their personal financial situation in the next 12 months and will likely remain wary about undertaking the significant financial obligation associated with homeownership until their view of their income, expenses, and job security heads in a more positive direction.”

Highlights:

•Twenty-two percent of respondents expect home prices to increase over the next year (up 3 percentage points since last month), while 22 percent say they expect home prices to decline, down 1 percentage point since last month. 53 percent say prices will stay the same, a 2 percentage point drop from October.

-Thirty-three percent of Americans say that mortgage rates will go up over the next 12 months, down 3 percentage points from October and a return to the level seen in September.

•Sixty-eight percent of respondents say it is a good time to buy a home (down by 1 percentage point since last month), and just 10 percent say it is a good time to sell, which is unchanged from the previous two months.

•On average, Americans expect home rental prices to increase by 3.2 percent over the next year, a 0.1 percent decrease from October.

•Just 6 percent expect a decline in home rental prices (unchanged since last month), while 41 percent of respondents believe that home rental prices will increase in the next 12 months.

•Thirty-two percent of Americans say they would rent their next home, while 63 percent say they would buy, down 3 percentage points since last month and a return to the level seen

That’s what Fiserv’s crystal ball says about the year to come.

The double-dip in home prices that started in 2010 continued to take home prices lower this spring and summer. Single-family home prices dropped 5.9 percent in 2011 second quarter compared to a year ago, according to the national Fiserv Case-Shiller home price indexes. Prices fell in 340 out of 384 metro areas, with 302 metros hitting new home price lows. Fiserv projects that home prices across the U.S. will decline another 3.6 percent by the second quarter of 2012, before rising by 2.4 percent by the second quarter of 2013.

“Housing affordability has improved dramatically because of declines in both prices and mortgage interest rates,” said David Stiff, chief economist at Fiserv. “The monthly mortgage payment for a median-priced single-family home is now $700, compared to $1,140 in 2006 - a decline of nearly 40 percent. Nationally, purchase mortgage payments now account for only 13 percent of monthly median family income, the lowest percentage on record (since 1971), and compared to 23 percent in the first quarter of 2006.”

Stiff blames weak demand for the anemic forecast. “Although homes have become much less expensive, housing demand remains depressed with existing home sales back to 1998 levels, averaging 4.3 million units per year since June. Many households cannot finance first-time or trade-up home purchases to take advantage of lower home prices because of much stricter mortgage lending standards. But even households with access to mortgage credit are hesitant to buy homes while job growth is weak and consumer confidence is low.”

Stiff pointed to several factors that can help the market find a bottom and begin a gradual and cautious recovery. “If economic growth picks up in the second half of 2011, then home prices should stabilize early next year. New housing construction is at an all-time low and inventories of foreclosed properties are starting to shrink. Lower levels of housing supply and more steady demand next year will reduce downward pressure on prices. As homebuyers become more confident, many who are sitting on the sidelines will begin to enter the market and prices will start to increase. But we should not expect a rapid rebound in home prices. Very large inventories of foreclosed properties must be liquidated and absorbed before the healthy functioning of housing markets is restored.”

“Potential buyers must be convinced that the economic recovery is back on track and that the double-dip in home prices is nearly over before housing demand will begin to rise,” Stiff concluded.

Other highlights from the latest Fiserv Case-Shiller Indices:

• Prices dropped by double-digits in 30 metro areas, while 25 metro areas had small price increases of 1 percent or more.

• Between 2011 second quarter and 2012 second quarter, prices are projected to rise by double digits in only two metros (Madera-Chowchilla, Calif. and Carson City, Nev.) and decline by double digits in 16 metro areas (Naples-Marco Island, Fla.; Las Vegas-Paradise, Nev.; Riverside-San Bernardino-Ontario, Calif.; Miami-Miami Beach-Kendall, Fla.; Salinas, Calif.; Cape Coral-Fort Myers, Fla.; Crestview-Fort Walton Beach-Destin, Fla.; Orlando-Kissimmee-Sanford, Fla.; Bethesda-Rockville-Frederick, MD; Merced, Calif.; Detroit-Livonia-Dearborn, Mich.; Jacksonville, Fla.; Ocean City, N.J.; Port St. Lucie, Fla.; Phoenix-Mesa-Glendale, Ariz.; Palm Coast, Fla.)

• Projections for the 2012 second quarter to 2013 second quarter period, illustrate why the housing market is poised to stabilize next year: home prices in 372 of the 384 markets are projected to rise in that time period, with only 12 markets expected to experience declines.

• California and Florida have borne the brunt of the worst declines in home prices. Of the 33 markets where homes have lost at least 50 percent of their value since peak, 28 are in the Sunshine and Golden States.

• In markets with the largest home price bubbles and crashes, improvements in housing affordability have been even larger. For example, the ratio of monthly mortgage payment to family income dropped from 32 percent (2006:Q1) to 11 percent in Las Vegas, from 42 percent (2007:Q1) to 19 percent in Miami, and from 59 percent (2007:Q2) to 27 percent in Los Angeles.

Two-thirds (67%) of developers surveyed last quarter by the National Multifamily Housing Council said construction activity is underway, and 20% are breaking ground on new projects at a rapid clip.  The other 47% reported an increase in pre-construction activities-acquiring land, lining up financing, getting building permits-but not much actual construction yet.

Yet even with this increased activity, more than half (54%) think new development remains considerably below demand.

“Powerful demographic trends along with changing attitudes about homeownership and tighter mortgage underwriting continue to drive a shift toward renting, which is fueling a ramp up in new construction,” noted NMHC Chief Economist Mark Obrinsky . “While some survey respondents expressed concern over sporadic overbuilding, others noted that the lack of construction financing may prevent some developments from actually breaking round.”

Overall, the apartment market continued its healthy growth, although there is some evidence of a slowdown.  For the sixth time in the last seven quarters, all four market indices were above 50-a reading above 50 indicates improving market conditions-although all four fell, suggesting less widespread growth than the prior quarter.

“A narrowing in the extent of the improvement is not unexpected after almost two years of strong gains,” said Obrinsky.  “As long as the economy continues to generate jobs, the apartment upswing should remain on track.”

Actually, that’s good news.  In the initial projections released in October 2010, cumulative Treasury draws (including dividends) at the end of 2013 ranged from $221 billion to $363 billion.  New projections released today by the Federal Housing Finance Administration (FHFA) estimate Fannie and Freddie will lose slightly less over a year-longer time period.

The projections have been updated to reflect the current outlook for house prices, interest rates, and recent trends in borrower behavior.  The difference can be attributed primarily to the fact that actual results for the first year of the projection period in the October 2010 projections were substantially better than projected.  Fannie Mae’s cumulative draws on the Treasury are higher than Freddie Mac’s in part because Fannie Mae’s mortgage book of business is approximately fifty percent larger than Freddie Mac’s.  In addition, Fannie Mae’s serious delinquency rates are higher than Freddie Mac’s.

The outlook also have improved because borrowers with high mark to market loan to value loans and modified loans are performing better than previously projected.  The number of serious delinquent loans has declined as transition rates to later stages of delinquency are lower than previously projected. Foreclosure delays pushed some defaults into later years of the projection period and beyond. Finally, REO sales prices are higher than previously projected.

With the Census Bureau reporting a net increase of 1.4 million households that moved into rental housing this year, or a 4 percent rise in the number of tenants, many in single family homes converted from ownership to rental.  Some 800,000 new households formed in the U.S. this year and the number of homeowners has fallen bv 600,000 homeowners. A Reis Inc. survey of professionally managed buildings in metropolitan markets found vacancy rates stood at 5.9 percent during the same quarter, the lowest since 2007 for that class of apartment.  Rates for the fastest growing segment of rentals, single family homes, are more difficult to pin down.

Calling the rental market “a bright spot” in the housing sector, Freddie Mac predicts this year will end with thud for home sales, with virtually the same number of sales as last year, 4.63 million.  Freddie’s current 2011 sales total is the same estimate as last month, but its forecast for 2012 rose slightly from 4.80 to 4.90 million sales.

“Much of the rental demand is from young and newly formed households who have decided to postpone homeownership in favor of renting during unsettled economic times. Indeed, the decline in the homeownership rate has been sharpest for those household heads under 30 years of age: While the U.S. homeownership rate has fallen about 1.5 percent over the past year (from 66.9 percent to 65.9 percent during the second quarter of 2011), owner rates have fallen by 4.4 percent (to 21.9 percent) for those under 25 years of age and by 7.0 percent (to 34.7 percent) for those aged 25 to 29 years,” said the Frank Nothaft, Freddie’s chief economist.

“With rental demand rising and apartment economics improving, the multifamily sector is a positive signal for the U.S. housing industry,” Nothaft concluded.

Freddie’s negative signals for the housing industry can be found in its October forecast.  It predicts the S&P Case Shiller Home Price Index will end the year down 3.7 percent, a point worse than last year, and prices next year will be even worse, falling an additional 4 percent, which would make 2012 the worst year for prices since the 18 percent price plunge of 2008.