Fitch Ratings has switched to predicting gains in new home prices for 2012 instead of modest declines, due to "overt price increases and mix issues." The average single-family new home price should improve by 4.25% and the median should rise by 4.5% in 2012.

The ratings agency made the comment in its summer 2012 "The Chalk Line" report on homebuilders.

Things are improving in the housing industry, but it is a moderate rise off a low point. Fitch said, "In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013."

But challenges remain, the report notes. Home price appreciation will be narrowly focused and very sensitive to such things as local economic, employment and supply issues. The demand side of the equation should continue to be affected by negative equity problems, tighter mortgage qualification standards and an excess supply of properties for sale due to foreclosures.

But it is not just that foreclosure-driven supply of houses that is influencing the market, Fitch added. There is a "negative buying psychology" in the market. "Many people expect or fear that home prices are vulnerable to further declines and buying now might be a mistake. This psychology applies to all types of buyers but especially applies to trade-up and second-home buyers."

Even with the optimistic price forecast, there still will be volatility. That might keep some people with a negative perception away from the market; on the other hand, it could force some of the fence sitters to act, Fitch said.

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