Growing concern over the faltering housing recovery has inspired an unusual vote of confidence for housing’s fundamentals from two of Wells Fargo’s top economists.

In a “special commentary” published in the bank’s web site, senior economists Mark Vitner and Anika R. Khan argue that too much progress has been made restoring growth to the overall economy for the recovery to reverse itself and problems facing housing today—weak demand, slow sales,  price deceleration—are not reasons for pessimism.

“There are a few isolated pockets of strength around the country, mostly in markets experiencing strong employment and income growth, such as Austin, Charlotte and Nashville. For the most part, new and existing home sales remain disappointing, as investor buyers have stepped away faster than traditional buyers have returned. Household formations are still lagging and most new households are still choosing to rent rather than buy,” they wrote.

“The disappointing run of home sales and new home construction figures masks a great deal of healing that has taken place in the housing market. Consumers have done a good job of repairing their balance sheets and fewer homeowners are in distress, with delinquency rates, foreclosures and the share of mortgages in a negative equity position all declining steadily over the past few years.

“While there continues to be a great deal of talk that attitudes toward homeownership, particularly among younger households, have changed in a way that will skew more households toward the rental market for years to come, surveys suggest that demand will revive once more households feel more secure about their job and income prospects.

Triple Dip for Home Prices?

“The recent deceleration in home prices has received considerable attention. Most home price measures have rolled over on a year-to-year basis and a few measures are posting declines on sequential basis. Both the Case Shiller 20-City and 10-City Composite indices have fallen in each of the past three months and the national composite index has fallen in three of the past four months. Home price measures from Core Logic, the FHFA and the National Association of Realtors have all decelerated in recent months, and after enjoying a strong run of pricing power, home builders are increasingly turning to incentives to sell new homes.

“While the bulk of the swing in prices is due to the entrance and exit of investors in the single family market, there are a number of moving parts when it comes to determining home prices. Inventories of homes remain exceptionally lean in most markets and new development has generally been more skewed toward higher cost urban and in-fill locations. Foreign demand has also been exceptionally strong in gateway markets like New York City, San Francisco, Seattle and Miami. By contrast, sales toward the lower end of the market have generally been lacking around the country, as first-time buyers have yet to come back to the market in a significant way. Development costs have also increased significantly, making it difficult to bring much affordable product to the market.

“Our home price chart has now clearly rolled over again but remains solidly in positive territory on a year-to-year basis. The deceleration in home prices is not all that surprising. We have been projecting much more modest gains in home prices for 2015 and 2016 for quite some time, and our own model of monthly movements in the Case Shiller 10-City index had pointed to a short period of price declines this past summer. We do not expect the recent moderation in home prices to result in a “triple dip,” however, which would see a year-to-year decline like we did a couple of years ago. The fundamentals have simply improved far too much for demand and prices to weaken on a sustained basis. Delinquency rates have come down, the backlog of foreclosures has been reduced and credit availability has improved.

“Our forecast has changed only modestly over the past month. Home sales and new single-family home construction came in close to expectations this past month. With seven or eight months of data in the books, the 2014 numbers are pretty much baked. Sales of existing homes are now expected to fall 3.7 percent from their 2013 levels, as investor purchases fell more than traditional purchases increased. New home sales likely fared better, rising 7.2 percent in 2014. We remain optimistic about the coming year. Lower mortgage rates, easing credit underwriting, rising inventories and stronger job growth should all help boost sales. We are looking for new home sales to rise by 15 percent this next year and existing home sales should increase 4 percent. Even with this improvement, new home construction will remain muted relative to previous cycles. “