The housing market recovery is driven by an improving industry and credit fundamentals, which will continue through 2013, according to Barclays Securitized Products Research.

However, there are major concerns including the fiscal cliff and shadow inventory.

The fiscal cliff has the potential of knocking the market back onto unstable grounds, which could lead investors to shed risk and pullback on risk-premium tightening.

Shadow inventory — properties not visible such as real-estate owned properties not in the open market and homes entering foreclosure — is also a concern that could potentially affect the housing recovery process. The gap between judicial and non-judicial states continues to widen, which could lead to disruption in the market, according to DBRS.

While home prices reached bottom during the first quarter of the year, the prices have rose throughout the year and will continue to do so. Barclays predicts prices to by 5.5% for the year and 4% by 2013. 

Money raised to invest in distressed and foreclosed properties, however helped the market and may continue to be a leading factor through the industry’s recovery period.

Housing demand has also exceeded its supply over the past years, which reduced many supply pressures throughout the nation. The most fundamental metros include Las Vegas, Phoenix and Tampa – sand states, which continue to increase in the housing market. 

"We are particularly optimistic on prices in areas where homes are trading below replacement values and household formation is positive," according to the report.

Housing starts aren’t expected to be nearly as high as last month, which had a 15% increase, according to Econoday analysts.

The top end projection of the consensus released Tuesday, 873,000 million units, is only as high as last month’s units.

The increase in the improvement of delinquent rolls will continue into the next year, while voluntary prepayments will likely stay moderate. However, if credit availability advances, prepayments will help with weaker credit cash flows.

Severities are expected to remain high for the remainder of the year, but should begin to decline over the next one to two years as a result of various developments, including better structure of defaults. 

Among weaker credit sectors, servicers will remain major drivers in the market. Larger servicers will provide predictability of performance and potential for representative and warranty benefits.

Rep-and-warrant payouts could aid bonds backed by larger banks. For example, Countrywide is expected to pay in the fourth quarter of 2013, while Residential Capital is projected to pay within the same time frame.

Cash flow into bond funds and alternative funds are projected to remain positive in the near term. As a result, long-term technical remain positive due to non-agency investors receiving about $70 billion in principal pay-downs over the next two years. 

"Even a small fraction of this re-entering the market would be a meaningful source of demand in what we expect to be a low issuance environment for mortgage credit," the report stated.

Although non-agency issuance is expected to multiply grow in 2013, it will be less than $20 billion, which remains at a record low. The home improvement and government-sponsored-enterprises guarantee book risk in the private market will help, but it will not be enough. 

cmlynski@housingwire.com