By Lynn Porter, Daily Journal of Commerce Staff Reporter

U.S. housing prices should fall 5 percent this year and start to stabilize in 2012, according to John McIlwain, an Urban Land Institute senior fellow who studies housing trends.

Massive foreclosures will keep pressure on prices, as will high unemployment and an oversupply of homes that is partly due to fewer households being formed post-recession.

“People haven't stopped defaulting on their loans just because the banks can't process the foreclosures,” McIlwain said. (There is a) huge backlog of non-paying single-family homes that are about to be put into foreclosure.”

McIlwain said he's seen some estimates of 4 million foreclosures this year, about the same as last year.

He gave his take on the national housing market in an interview yesterday with the DJC. The Urban Land Institute is a growth think tank.

McIlwain said apartment rents are rising and vacancies dropping, and tight construction financing will limit supply this year. “If jobs come back there's likely to be a significant rise in demand for apartments” as more people move out on their own, he said.

Home values in central cities and suburban town centers should continue to be the strongest given the attraction of urban living and the high cost of developing in-city, he said. “There's virtually very little suburban development or exurban development going on now.”

Longer term, young families who want the suburban experience but don't have the income or inclination to pay high home prices may move to suburban fringes with cheaper housing, he said. Longer commutes and a lack of jobs near those homes mean prices likely won't appreciate, he said, making such moves a “bargain with the devil.”

“Some people think they're going to be the new ghettos,” he said. “Some people think they're going to have to be rebuilt with new configurations.”

Many young people are attracted to cities, he said. Developers have started building smaller, more affordable apartments with open designs to attract the 18-32 age group, whose wages have declined over the last decade, and who face “huge unemployment,” McIlwain said.

Some younger folks want apartments with two or three equal-size bedrooms so they can share rent, he said.

They want efficient HVAC, plumbing and windows because “they're very sensitive to utility prices” and want to live greener. Amenity choices are also different from their parents': concrete rather than granite countertops, wireless rather than wired.

McIlwain said some baby boomers aged 56 to 65 will also move to cities because they want the same things younger people want: jobs, transit, shopping, culture. Some of these boomers will keep working because of recession-diminished finances, so in-home offices may be popular. They'll also want good kitchens, exercise facilities, and an extra bedroom for visiting grandkids.

For the near term, some baby boomers in the 47-to-55 age group will be unable to move to cities because they can't sell their suburban homes, McIlwain said.

He said to expect little condo development over the next few years given tight construction financing and Fannie Mae rules that require 70 percent presales before mortgages are guaranteed. This could be good for condo prices, he said.

Overall, developers are going to have to create “niche projects” that cater to people with different aspirations and price-point expectations, he said. For example, more single women are living alone, more couples are childless, more younger people are sharing housing.

“Everybody is looking more closely at what the market wants,” he said.