The Canadian Press

Bank of Montreal (TSX:BMO) chief executive Bill Downe says he sees a recovery playing out in the U.S. housing market as supply and demand for new homes evens out and lending returns to more traditional levels.

Downe, who was speaking at a Morgan Stanley banking conference in New York on Wednesday, predicted that the next two years will mark a gradual return to normal for the market.

He suggested more borrowers will likely opt for fixed rate mortgages instead of adjustable rate mortgages, as interest rates creep back to more normal levels over time.

“There is a little bit of an overhang of adjustable rate mortgages that has to be adjusted, but 2010 to 2011 will probably see a pretty reasonable return to balance, and while that seems like a heck of a long time looking forward, a year or two in the rear-view mirror is just a moment in time,” Downe said.

In the U.S., where BMO operates Chicago-based Harris Bank, Downe believes the housing market will start to even out as new home starts come in line with demand.

“I’m pretty optimistic about the U.S. housing market reaching a state of equilibrium, if only because the rate of homebuilding has slowed so greatly and there is a natural absorption of new home capacity that takes place every year,” he added.

Bank of Montreal reports its first-quarter earnings on March 2.

Its shares were down 52¢ to $52.69 on the Toronto Stock Exchange.