Although many have called recovery in the housing sector, one financial services firm believes home prices have yet to hit bottom. JPMorgan (JPM) analysts now expect home prices will reach bottom sometime in the middle of this year, with a peak to trough decline of 34% on the Standard & Poor’s/Case-Shiller index. “We continue to expect negative home price returns on a year-over-year basis through the second half of 2011, leaving overall home prices down 3% in 2011,” JPMorgan said, adding that a slow and modest recovery is expected in 2012 and 2013. JPMorgan analysts cited the mixed economic indicators of late as reasons for their projections. Existing home sales were up in the first quarter and the economy continues to add job, but mortgage application trends remain weak and housing inventory keeps climbing. Capital Economics reported home prices are now dropping at a more rapid pace than the beginning of the year, which analysts at the Toronto-based research firm attribute to an increase in distressed sales. This may help move cheaper homes off the market but analysts said this downward trend in prices is likely to continue into next year, as well. Distressed sales drug down prices in the first quarter, according to the National Association of Realtors, which reported the median sale price at $158,700, down 5% from the same period of 2010. Residential listing service Movoto found these types of properties are dominating market inventory in a recent survey. The company said 49.2% of real estate agents they asked reported the majority of their inventory is short sales. JPMorgan analysts said “the continuation of falling rental vacancies and rising rental demand will make home buying increasingly attractive,” especially as rental prices increase. Rental vacancies rose but remained at the lowest level in more than three years, according to JPMorgan. On the whole, JPMorgan said things could be worse. Back in the spring of 2009, home prices could have easily declined an additional 10% to a peak-to-trough level of 40% level, the firm said, if there were no direct government subsidy available to bring homebuyers back and other efforts to keep buyers in their home. The firm said the Home Affordable Modification Program and Home Affordable Refinance Program give the market and home prices greater stability. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.

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