“More certainty” and “more stability” in the market contributed to a boost in activity during January, according to officials from Northwest Multiple Listing Service. Brokers reported an increase of nearly 27 percent in pending sales from December and a 28 percent jump from twelve months ago.

Two other indicators of activity fell – inventory and sales prices. There were 3,915 fewer active listings of single family homes and condominiums in the entire MLS system compared to a year ago, a drop of about 10 percent. Sales prices area-wide for January closed sales declined about 4.8 percent from figures a year-ago ( the NWMLS service area covers 21 counties).

For Whatcom County, in January, pending sales of residential homes were down 7 percent while closings were up 5.5 percent. Our listing inventory of residential homes was up 26 percent compared to January, 2009. Prices were down about 3 percent for the entire county.

Currently, there is about 13.5 months of inventory ( ratio of houses for sale to houses sold). January, 2009 was 14.6 months of supply. Economists consider a supply of six months to be a balanced market. One month can be deceiving but due to the increase in listings and reduced closing the supply number is somewhat skewed. A first quarter analysis will be telling. The absorption rate was 7.4 percent as compared to 6.8 percent from January, 2009. The absorption rate analyzes how many homes have sold of the existing inventory in a month.

Nearly 80 percent of the residential sales were under $350,000 which is about the same compared to the same time last year.

With the nationwide unemployment rate climbing above 10 percent, could 2010 see even more declines in real estate prices?

One of the most important influences on housing prices is the employment rate. When employment is high, people are more likely to purchase. In such an environment, there is optimism that if you lose your job, you will be able to find a new one.

Today, we’re facing some of the highest unemployment rates since the Great Depression. Is it possible that the housing market can make a recovery in light of these conditions?

Here are several key factors to determine what is most likely to happen in your market.

1. Markets aren’t just local, they’re “hyperlocal.”

Prices may be down in your state, county or city, but up in your local area. For example, it’s common for the first-time-buyer market to have shortages of inventory while the remainder of the market is glutted with inventory.

To determine what will happen in your local market, you must consider the “hyperlocal,” or “micro” market, conditions. In most cases, this means what is happening within a one-mile radius of where the property is located. It also means considering only those properties that have square footage and lot sizes within approximately 10 percent of your property square footage and lot size.

2. Months of inventory on the market are the best predictor of price changes.

Even though the National Association of Realtors is forecasting that existing-home sales will jump 10.8% in 2010, after a 4.8% increase in 2009, the real issue is how much inventory is on the market in your local area.

During the 35-plus years I have been in business, I have found the amount of inventory in a given location and price range to be the best predictor of what prices will do several months from now. As a rule of thumb, price changes lag behind inventory changes by about six to 10 months. If there are only two or three months of inventory in your market, chances are good that prices will be increasing in 2010. On the other hand, if there are eight or more months of inventory, your area may experience price declines well into 2010.

3. Extension of the first-time-buyer tax credit

While many people feel the first-time-buyer tax credit was responsible for the upswing in sales activity this fall, NAR reports that only six percent of the buyers attributed their decision to purchase this fall to the tax credit.

There are two key issues for 2010. First, will the extension of the tax credit produce enough buyers to create a price increase?  Second, what will happen to the market when the credit runs out?  Will sales drop as substantially as they did when the Cash for Clunkers car-buying program ended?  Will NAR try for another extension even though the Obama administration has signaled that  “this is the last time we’re going to be caving to the demands of NAR.”?

4. Demographics bode well for increased sales activity

Gen Y (born 1977-94) are now at their peak time for buying their first home. There are now more Gen Y’ers than there are baby boomers ( 1946-64). This huge cohort of young adults is marrying and having children.

In fact, the typical married Gen Y mom has 2.3 kids. Owning a home is part of their American dream. Although the unemployment rate is even higher among this group, most still have jobs. Coupled with the first-time-buyer tax credit, this could be a strong force to drive prices upward.

5. The Real Issue: Cost of ownership, not sales price

The real driver of price in 2010 will continue to be the cost of homeownership. This is a huge wild card for a variety of reasons.  If interest rates increase from 5% to 7%, or even from 5% to 6%, the impact on monthly payments would take a would-be-buyer off the market.

And changes of this magnitude could take place as early as 2010. The reason?  Interest in the sale of US Treasurys that are used to finance our debt is weak. This means that the government could raise interest rates to attract more buyers. The other issue is the decline in value of the US dollar, which, in turn, can result in inflation. The Federal Reserve typically responds by raising interest rates to cool inflationary pressures.

The third factor that could drive up the cost of home ownership is the decline in tax revenues at the local and state levels. This could result in increased property taxes in some areas. Increased costs shrink the pool of potential buyers, resulting in fewer sales and potentially a decline in prices.

Bottom line:  Watch the sales levels and the inventory in your local area. If sales are increasing and inventory is decreasing, look for stabilization of prices first and then, eventually, an increase.  On the other hand, if the inventory is static or increasing, 2010 will probably be similar to 2009.

Local real estate numbers are now in for August. Here are a handful of stats and my analysis for the Whatcom County housing market in the month of August, which I’ve paired with month-to-month and year-to-year comparisons.

Active Listings, Pending Sales and Closed Sales
We’re seeing less listings on the market than we have in years past. Current local active residential listings are down by about 11% from the same period one year ago.

I recently commented on the trend of rising pending home sales on the national level, and we’re noticing that same trend here at home as well. Local pending sales numbers are up 14% for the month, and they are up 8% for the year over the same period last year.

However, not all of those pending sales are turning into closed sales. Closed sales are down 10% for the month and down 15% for the year, which may be attributed to a growing number of transactions missing their closing date deadline (I’ll talk about this more later).

The graph below shows the trends in the number of Whatcom County homes for sale, the number that have sold, and the number that are pending, from June 2008 to August 2009.

Median, Average Home Prices Down

Whatcom County’s year-to-date median home price has fallen 5.3% from last year. It now stands at $265,000, compared to $280,000 this time last year.

The average price of homes for sale in Whatcom County has also dropped from this time last year (down 2.5%), from $448,000 to $433,000. As you’ll notice, the average home price is significantly higher than the median home price, as average prices are skewed upward by the higher priced homes on the market.

The following graph shows the discrepancy between the average price of homes for sale and the average price of homes sold in Whatcom County, for the past 14 months.

Condos
Condominium pending sales continue a downward trend both for the month (down 23%) and the year (down 35%). Closed condo transactions also remain slower: down 50% for the month of August and down 50% year to date.

Local Price Reductions = Rising Affordability Levels
Fortunately for buyers, price reductions have put local housing affordability levels at their highest levels in decades. Add attractive interest rates and an $8,000 tax credit for first time home buyers, and what we get is a situation that is enticing buyers back into the market (as seen in the rising number of pending home sales, both on the national and local levels).

Common Transaction Delays and Disruptions

On the downside, many local transactions are missing their closing date. Last minute demands from lenders are common and final underwriting reviews are causing delays. Inexperienced appraisers are gumming up the works as well. For those of you who are planning to take advantage of the $8,000 first time homebuyer credit, plan ahead and allow for delays.

The Road Back to a Balanced Market
Our market will need a string of months of positive sales growth if we are to get back to a truly balanced market. That is because inventory levels still place us squarely in a buyer’s market, with a 10.1-month supply of homes for sale (meaning it would take about 10 months for our current inventory levels to sell, were no new listings to be introduced to the market).

Prices will continue to correct down until we are back in a balanced market, which is characterized by a four to six-month supply of homes. Fortunately, we have already seen evidence of local prices stabilizing in the last few months. And, with the amount of activity we’ve seen in the last three months, we may have reason to believe that a balanced market is not too far away.