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Home prices: Where's the market headed?

Home prices peaked in the US five years ago. Here is a look at the key issues affecting home prices as the spring real estate market approaches.

By Staff writer / February 10, 2011

A jogger and dog run past a house posted with a new price Jan. 25, 2011, in Seattle. Home prices are falling across most of America's largest cities, and average prices in eight major markets have hit their lowest point since the housing bust, according to the Standard & Poor's/Case-Shiller 20-city home price index. Eight cities, including Seattle, sank to their lowest levels since prices peaked in 2006 and 2007.

Elaine Thompson/AP/File

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Is it going to be a buyer's or a seller's market?

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The big picture is pretty simple and familiar: America has an excess supply of homes on the market, due to an ongoing surge of loan defaults and foreclosures.

Spring is often a busy season for home sales, as is the fall, with families trying to find new digs as one school year winds down or as another one begins. But that doesn't mean buyers will outnumber sellers.

"It's still a buyer's market," says Maria Peña-Morales, who manages a team of real estate agents at RE/MAX Ranch and Beach in San Diego. Still, she characterizes home prices in her region as starting to firm up rather than falling as they were in 2008.

Nationwide, buyers can find plenty of good opportunities, and it's also a good climate for investors to buy homes with the aim of earning rental income.

Where are home prices expected to be?

Home prices are showing weakness, falling in the latest report of Standard & Poor's Case-Shiller indexes for major cities. Six of the 20 cities are actually at their lowest point so far in the down cycle that began in 2006.

That doesn't necessarily mean prices will keep falling through the spring and beyond. Forecasts vary from steep losses in home values to very modest gains in 2011.

In December, the National Association of Realtors predicted that the national median sales price for previously owned homes will rise 0.6 percent in 2011 and 2.4 percent in 2012. That view, shared by some other private-sector economists, hinges on the notion that an improving jobs market will be boosting buyer demand and confidence.

Others are more pessimistic. Forecasters at the investment firm Morgan Stanley, for instance, while having a relatively positive outlook for the overall economy, see home prices falling by 10 percent this year before hitting bottom. Many analysts expect more modest declines, with Moody's Analytics calling for a 5 percent fall in home prices in 2011, and a 0.6 percent gain in 2012.

NAR chief economist Lawrence Yun says prices are very difficult to forecast, because they can easily overshoot on the way up or down. In his view, the "bubble" that existed in many markets has been removed, judging by current ratios of home prices to the cost of rental properties or to personal incomes.

What factors hold the key to price changes?

Many factors play a role, but perhaps the biggest ones in 2011 will be jobs, interest rates, and foreclosures. The more people can get jobs, the more potential home buyers there are. That buoys the confidence of employed people, too, because they will be less worried about losing jobs. The job market is widely seen as improving, but how strongly is an open question.

Mr. Yun says he expects the economy to add 2 million new jobs this year, or about 167,000 per month – positive but not a rip-roaring pace given the roughly 8 million jobs lost during the recession. The big question is whether the lift from an improving economy will be offset by two negative factors, the drag of rising mortgage rates and the glut of distressed properties for sale.

Are there some regions of the country where the market is better than others?

The recession brought weakness to nearly all metro areas in the United States, but not in equal degrees. Some are now seeing prices rise. Yun pegs Washington, D.C., as America's strongest housing market, thanks in part to being "stimulus central," with lots of government contracts creating jobs.

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