The United States housing market will continue to improve in 2013, as long as the U.S. economy continues its slow recovery, according to a report from Standard & Poor's.
The agency believes that the economy will continue to grow slowly in 2013, avoiding any major negative impact associated with the fiscal cliff and growing federal deficit.
"We believe that as long as the U.S. remains in recovery mode, U.S. housing fundamentals will continue to improve, bolstered by low interest rates and rising home prices," analysts wrote in a report.
"Taken together, we expect these trends to support improving consumer confidence and lead to a return to historical housing supply-and-demand fundamentals."
The economy grew 3.1% in the third quarter of 2012, up from 1.3% the previous quarter, and the unemployment rate declined to 7.7% in November from 8.7% a year ago. October home prices were down month-to-month, but up compared to the same period last year, according to the latest S&P Case-Shiller index.
Standard & Poor's forecasts that U.S. national home prices will increase 5%. Sales volume and average selling price exceeded expectations, and the agency expects that homebuilders it rates will deliver on average 20% more homes in 2012 compared to 2011.
Favorable housing supply-and-demand fundamentals will continue to support strong revenue and earnings growth in 2013, but tight lending standards will remain a concern for demand because the limited availability of credit could weigh on borrowers, the report said.
Mortgage banking saw a strong year in 2012, but mostly due to refinancing activity, with the help of government programs and low borrowing rates. S&P expects this trend to continue in 2013, but banks may struggle to duplicate strong performance next year because the pool of borrowers eligible to refinance is shrinking.
"One primary risk to our baseline housing forecast is the potential failure to resolve looming fiscal cliff issues, which could send the U.S. economy into a recession," the report said.
"Under this scenario, the downside for housing could be severe, since consumer confidence and new job formation, two key economic supports for the current housing recovery, would likely decline significantly."
Another risk to the housing outlook is the pending regulatory and policy changes next year, arising from the 2008 financial crisis and resulting legislation such as Dodd-Frank. S&P said that poorly designed policies or extensive regulation could further erode an already weak lending environment.
The impact of a recovery in the housing market varies across the many housing-related sectors and securities that Standard & Poor's rates. While the improved housing forecast applies to all sectors, the pace and depth of improvement will depend on many factors, including each sector's ability to participate in the recovery and their exposure to legacy portfolios and markets.
— Bonnie Sinnock contributed to this report