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.

Existing home sales surged in September, bringing sales to the highest point since 2007. At the same time, the Department of Commerce just reported that sales of new single family homes fell 3.6% in September to an annual pace of 402,000 units.

Sales of both existing and new homes had been on the rise of late, encouraging many an economist that the worst is behind us.  Some will say that the new home sales numbers show that this will be a shakier recovery than in past recessions.

That may be true, but keep in mind that home sales as a whole are up by a pretty large margin. Those sales are helping bring down the inventory of unsold homes, which is so vital to returning to sustainable times.

Analysts had expected new home sales to rise to 440,000 units, most likely based on the final push of first-time buyers looking to take advantage of the $8,000 tax credit.

Buyers looking at new homes will find some homes that are already completed and those that are not finished. First-time buyers, who account for nearly 45% of the buyers at the moment, are looking to eliminate any possible risk of missing out on the credit.  Purchasing a home still under construction without a guarantee of closing before 11/30 will push many would-be new homebuyers to existing homes.

The numbers may already be bearing this out. In September, sales of existing homes jumped 9.4% to an annual rate of 5.57 million. This is the highest rate in more than two years.

According to Freddie Mac’s Weekly Primary Mortgage Market Survey (PMMS), the average rate on a 30-year fixed rate loan came very close to hitting an all-time low again last week.

At the end of last week, the average rate was 4.94%. That is the lowest level since May 28, and it was awfully close to  the record low set on April 30, also of this year. To put that number into perspective, the average interest rate was 6.10% this time last year.

What This Means for Home Buyers
Since June, this rate has dropped by about 0.65% (from 5.59% in mid-June). To give a sense of what this size of a drop means for home buyers, someone with a $300,000 loan and an interest rate of 4.94% would save about $1,450 per year (versus a 5.59% interest rate), or about the cost of one mortgage payment.

What About Refinancing?
Hearing about low interest rates may make one consider refinancing an existing loan. But, before you do, remember there is more to think about than just the monthly savings. Lenders typically charge for the refinance, and that should be compared to any expected monthly savings.

If there’s a chance you’ll be moving in the near future, the costs may likely outweigh the savings. However, if you plan to stay long enough for the monthly savings to outweigh the upfront costs, then the refinance might be a smart move.

Average Rates Since 2005
The table below (from FreddieMac.com) shows how the average monthly interest rates have fluctuated since 2005.

Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages

It’s important to note that these rates are just averages. Actual rates are going to vary for each home borrower, as they are affected by the size of one’s down payment, type of loan taken out and the borrower’s credit score.

Fees and Points
Besides the interest rate, a borrower should keep an eye out for the fees and points a lender charges for the loan (displayed in the “Pts” column in the table above). Along with interest, those fees and points combine to make up the actual cost of the loan reflected in the Annual Percentage Rate (APR). According to the PMMS, the average fees and points charged on the 30-year-fixed rate loan has remained at 0.7 since October 2008.

More information on what mortgage rates have done historically can be found at FreddieMac.com/pmms.

Here’s a short video (from WA Homeowners) explaining how first-time home buyers can receive up to $8000 toward the purchase of their new home:

Deadline to take advantage of this federal government tax credit? November 30, 2009.

You can also find more info on this program here.

Recent national housing stats show an upward trend in the number of pending home sales (where the contract has been signed but the transaction has not closed). This article from the National Association of Realtors points out that this trend has actually been going on for the past six months.

West up; Northeast and Midwest down
According to the NAR, July pending home sales across the country were 12.7 percent higher than the same period in 2008, and they were also at their highest point since June 2007. Regionally, this trend is being buoyed by pending home sales in the West (up 12.1% from June, and 20% above this time last year), as pending home sale numbers in the Northeast and Midwest saw month-over-month decreases.

Tax credit motivating first-time homebuyers
As the article points out, a significant contributor to this trend is the high number of first-time home buyers who are entering the market to take advantage of the $8,000 tax credit available to them. As this deadline looms, that could have an impact on the high number of pending home sales we’re now seeing.

Future sales indicator
Pending home sales are often used as an indicator of future home sales. While all pending home sales may not close, this index is generally seen as a reliable indicator of housing market activity. More pending home sales means more buyers are in the process of closing on a home, so this is certainly encouraging news.

Inman News, a great resource I use regularly, also reported on this trend. You can read their article here.

Local stats should be in soon. So stay tuned to find out if this trend is occuring here locally as well.

Looking at the most recent local housing numbers, most numbers are moving in the right direction, with Bellingham neighborhoods coming to life and move-up buyers re-entering the market.

Recovering Market
The variable results we saw in July reflect what we’d typically expect from a recovering housing market—a few steps forward for some neighborhoods, a step back for others. Whereas comparisons to a year ago reflect some substantial gains, on a month to month basis, we’re probably going to experience some “spongy” results for a while.

Tax Credit Motivation
First time buyers are motivated by a looming deadline for the federal $8,000 tax credit, which is propelling activity. There seems to be a feeling of urgency to take advantage of this program before it goes away on November 30, 2009.

Pending Home Sales Stable
The Whatcom County housing market continues to show mixed signals, but the most important number, pending home sales, is trending in the right direction.

Pending sales are contracts that are accepted by a seller but have not yet closed. They represent the most current activity and show how active buyers are in the market. Nationally, the Pending Sale Index has increased for five consecutive months. Even though Whatcom County was about even from July 2009 to July 2008, the trend is positive. I expect the Pending Sales Index to continue rising over the next few months.

Inventory Levels Flat
While the local housing inventory levels have ebbed and flowed during the past year, recent numbers are pretty flat from this time last year. Currently, our market is at about 7.8 months of inventory (which is the current amount of inventory divided by the average monthly sales).

Closed Home Sales Down Slightly
Unfortunately, the number of closed home sales in July 2009 was down 3% from a year ago, logging 213 sales versus 220 in July of 2008. After June sales posted only the second consecutive month of year-over-year increase in about two years, it is disappointing to see fewer sales in July.

The difference in the performance of closed and pending sales is due primarily to the fact that many local sales are simply taking longer to close. Short sales, where the net proceeds to the seller will not cover the outstanding debt on the property, are taking 60 to 90 days to close, as the buyer and seller must wait for the bank to approve the sale.

Looking at the local real estate numbers for the month of June, I’ve noticed some pretty encouraging trends. Here’s what stood out to me:

Fewer Homes Listed, More Under Contract
For starters, the year-over-year positive movement is encouraging. Compared to 12 months ago, Whatcom County has 372 fewer homes (-10.5%) listed for sale and 107 more homes (8.5%) under contract. This is an improvement that will hopefully sustain itself over the second half of the year.

Pending Sales Up, Closed Sales Down
It’s also reassuring to see that the number of pending sales are at their highest level since the credit bubble burst nearly two years ago. Year-to-date pending residential sales are up 8.5%, while closed sales are down 19%. However, the number of closed sales for 2009 are increasing in the last two months.

Tax Credit Working
All of this means the $8,000 tax credit is working: low interest rates and declining inventories have helped to reactivate buyers in the more affordable price ranges. The federal tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence before December 1, 2009.

More info on this tax credit for first-time home buyers can be found here.

Median, Average Prices Down
The overall median price in Whatcom County is down 6.3% and the average price is down 10%. While the median and average sales prices for Whatcom County homes are both down, prices have flattened over the past seven to nine months.

Neighborhoods
Data shows some local neighborhoods are rebounding faster than others. It appears to be a transitional market, and accurate neighborhood information is critical for buyers and sellers.

Short Sales Are A Drag
Short sales continue to be a drag on the market, frustrating agents, buyers and sellers. Even though we have fared better than most areas of the country we still have an abundance of short sales. This is a big reason the median price is shifting down to levels equal to 2006.

Inventory Levels Down, But Balancing
Residential inventory levels are down 10.5%, but local inventory levels are trending toward a more balanced market, with sales below $350,000 showing a Seller’s Market.

For the month of June, Whatcom County monthly inventory levels were at 7.6 months (meaning it would take an average of 7.6 months to sell all of the currently available inventory). Year to date, the monthly inventory level in Whatcom County was at 12 months. Six months is considered a balanced market.

This trend varied very little throughout the individual cities in Whatcom County, with Bellingham at 5.2 months of inventory for the month of June. When we look at more expensive homes, they averaged 24 months in the county, while Bellingham was at 18 months.

Bellingham Herald Business Editor Dave Gallagher recently wrote this article, which points out that Bellingham’s home sales have stabilized for the first time since 2007. As the article mentions, 82 Bellingham homes sold in the month of May; the same number of homes sold in May of last year.

Whatcom County home sales outside of Bellingham have yet to reach this point. Many local areas are still seeing year-over-year deficits in terms of the number of home sales going through.

One of the other local trends that I commented on in this article is that most homes are being sold in the $350,000 and under price range. This tells us that a lot of first-time homebuyers are getting in the mix as of late, and that this segment seems to be driving this local stabilization.