U.S. home prices will stagnate through next year and only start recovering in 2013, according to economists polled by Reuters who also felt the stimulus options being floated will not do much to reinvigorate the market.

The housing market, considered by many as critical to any meaningful economic recovery, is still struggling to find its footing after collapsing by a third over the past several years, leaving many owing more than their homes are worth.

The poll of 27 analysts taken Nov. 17-22 was more downbeat than a survey taken two months ago, which predicted small home prices rises next year of less than 1 percent on average.

[pullquote_right]“Unless there is principal reduction, the only cure for the housing market is time — lots of it” [/pullquote_right]With an excess of unsold homes holding prices down and more foreclosures expected, lawmakers and experts have floated various options for propping up the market until the economy improves and Americans start buying homes again.

But most of the economists polled were sharply critical of two of the main proposals: more purchases of mortgage-backed securities by the U.S. Federal Reserve; and a reduction in loan principal for struggling homeowners.

“We see little prospect that any policy action will meaningfully impact the housing outlook over the next year,” said Sam Bullard, senior economist at Wells Fargo.

“Unfortunately, a sustained improvement in housing will not likely get underway until the mountain of foreclosures is cleared and the price discovery process plays out.”

The Fed, which has effectively run out of interest rates to cut, has already bought more than $2 trillion in long-term securities to keep rates low. It has said it is considering the possibility of additional MBS purchases.

Economists said another round of such purchases from the central bank would be limited as already low mortgage rates have done little to spur home buying.

Just seven analysts said more MBS purchases would make a material difference, while 20 said they would not.

As well, 19 out of 26 who replied said prices could eventually recover without a major program to write down principal payments.

Opponents of such a scheme argue it would come with a hefty price tag, and such a measure would likely be politically sensitive heading into an election year.

Advocates say it’s the only way to head off another wave of foreclosures by keeping underwater borrowers in their homes and will speed up the recovery. Seven economists said house prices would not recover without a writedown plan.

“Unless there is principal reduction, the only cure for the housing market is time — lots of it,” said Paul Dales, senior U.S. economist at Capital Economics. “It will take years of modest house price appreciation for households to climb out of negative equity. Until that happens, demand will remain weak.”

Home prices as measured by the S&P/Case-Shiller home price index are expected to finish out this year down 3.3 percent compared with the 3.8 percent decline forecast in the September’s poll.

But prices are seen slipping 0.3 percent next year compared to September’s forecast for a 0.8 percent gain. Prices are expected to rise a meagre 1.5 percent in 2013.

Eighteen economists said they see prices bottoming in 2012, with 12 of those expecting it will happen in the first half of the year. Just one economist each said a bottom won’t be found until 2013 and 2014, while 7 said it has already happened.

Expectations for existing home sales were unchanged at 4.95 million homes for the fourth quarter, while analysts modestly lowered their forecasts for the first quarter to an average annualized rate of 5.03 million homes from an earlier forecast of 5.10 million homes.

SOURCE: US Business News – CNBC