Fitch Ratings said the foundation is in place for "mild" recovery for the U.S. housing sector, though the economy continues to temper a revival. In a report released Tuesday, the ratings service said it expects existing home sales to grow 3% for 2012, with single-family housing starts and new home sales up 5% and 5.5%, respectively. Fitch's report follows another Friday by Fannie Mae. Economists at the government-sponsored enterprise predicted a 3.5% increase in total home sales for 2012. The housing sector finds itself coming off a disappointing year, Fitch said, much the same as a year ago. It's also not filling its traditional role, the report said, as a driving force for a post-recession economy. But the economy itself, Fitch said, continues to drag on the market. Home prices could lag over at least the next few quarters with employment and financial markets unstable and declines in personal income. The Census Bureau reported a 2.3% decline in real median household income to $49,445 in 2010. A "negative psychology" from potential homebuyers could also weigh down the market, Fitch said. "Many people expect or fear that home prices are vulnerable to further declines and buying now might be a mistake," the report said. "This psychology applies to all types of buyers, but especially applies to trade-up and second-home buyers." Fitch said homebuilders should remain cautious on land purchases and reductions in liquidity, or cash, in 2012. Builders currently can do little to effect revenue and profitability, the report said, but can still control balance sheets. The ratings service has most homebuilders on stable credit outlook, with the exception of negative credit watches on PulteGroup (PHM) and KB Home (KBH). Any progress, or contraction, in housing could bring a "reconsideration of ratings," Fitch said. The next decade will likely bring more mergers and acquisitions in the sector, Fitch said, much like the Pulte-Centex Corp. deal in 2009. Write to Andrew Scoggin. Follow him on Twitter @ascoggin.