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Homeward Bound

The housing market turned the corner in 2012. What that could mean for 2013.

After years of bleak housing figures, bottoming prices, and what seemed to be an endless barrage of foreclosures, the housing market is slowly beginning to turn the corner. Last year marked a year of promising indicators, with December posting the fifth consecutive increase of home prices nationwide. There was also positive news in housing starts, new home sales, and building applications. By year end, the U.S. housing market proved to be one of the most successful sectors of the economy. The question is whether or not the good news of 2012 will translate to a full fledged rebound in 2013.

Bottoms Up
After almost six years, last year saw the first signs of life emerging in the housing sector. Though by no means robust, all indicators seem to support that the bottom may have finally been reached by the end of 2011 and things are slowly tilting up. Depending on what part of the country you live, market conditions will vary in 2013. But common belief is that there is no longer a reason to fear any major price declines. Would-be-buyers who have waited for the bottom before looking for a new home may finally feel the time is right to start moving off the sidelines. The turn in the market is a win-win for both sellers and buyers alike. For those who are looking to sell their homes, the good news is that they are beginning to feel as though they won't be selling at absolute bottom. And buyers should be motivated to get a deal done before prices and interest rates begin to inevitably inch higher.

Moving Towards the Surface
At the end of last year, approximately 28.2 percent of homeowners still had a mortgage that was underwater. Though the number is still sobering, this figure marked the first time in almost two years that the number of people owing more on their mortgages than what their home was worth fell below 30%. But as home values continue to move upward, more and more people will find their homes rising to the surface. This will present more options and opportunities for homeowners looking to right the ship.

Historic Affordability
The Federal Reserve has suggested that it will keep interest rates low until unemployment reaches 6.5%. This creates a perfect storm for any would-be-buyers. With home prices being much lower than their peak in 2005 and interest rates at historical lows, anyone wanting to jump into the housing market should prepare to do so. Lending practices are still tight so any potential buyers have to be ready. This requires a good credit rating, favorable debt-to-income ratio, and twenty percent down. As lenders begin to loosen their tight grip, this could result in a real renaissance in the housing market.

Mortgage Interest Deduction

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The wild card to determining the pace of the housing rebound is the Mortgage Interest Deduction. From the election debates to the "fiscal cliff" talks, this deduction has been tossed around repeatedly as a way to reign in and reduce the nation's deficit. If the deduction is eliminated entirely, this will inevitably throw water on the pace of the recovery. The prospect of losing this deduction is an emotional one for most homeowners and potential buyers. But even if eliminated entirely, the average American does not benefit as greatly as they think. The truth is not every homeowner gets a tax break. In order to realize this benefit the homeowner needs to itemize deductions. However, many gain a greater tax benefit by using the standard deduction. Also, every dollar paid in mortgage interest does not result in a dollar for dollar reduction. The greatest impact of the elimination of this deduction will be felt by those who purchase large homes or homes in the more expensive areas.

Benefits for All
The recovery of the housing market could boost the pace of the recovery of the economy over all. Aside from the obvious sectors benefitting, like the banks, title companies, and construction, other industries, like home improvement stores, furnishing and landscaping could be fueled as well. With home ownership comes consumer consumption. And consumer consumption is the stimulus needed to spur employment, manufacturing and a sustainable economic recovery.

As U.S. home prices and sales are poised to rise this year, the recovery appears to be underway. Low prices, record low mortgage rates, and decreasing unemployment rates should provide a solid foundation to keep the momentum going. Though the possible debate about the elimination or cap on mortgage interest deduction could slow the recovery, low prices and low rates may be too attractive to ignore and should keep buyers in the market. Though only time will tell if this will be the year of a full fledged housing rebound, it is safe to say that the clouds have parted and the sun is starting to peek through.

Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is thefounder, owner and  principal of Diccianni Financial Group, Inc., East Norriton, PA. You can contact her at Lawson is client manager with Diccianni Financial Group Inc.

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