RealEstateEconomyWatch.com

As we approach the New Year, we are more hopeful about prospects for 2010 compared to the dismal performance of 2009. This past year was a year of crises. The economy was on the brink of Depression, shedding 8 million jobs during the past two years, while the unemployment rate climbed sharply to 10 percent (as of this writing) from 4.9 percent. The U.S. credit markets and banking system virtually collapsed, foreclosures became rampant and the housing sector crashed with home values plummeting 10 to 15 percent in most metropolitan areas across the nation.

Government bailouts were commonplace, with taxpayer dollars replenishing the coffers of Wall Street companies, large financial institutions, insurance companies and even the automobile industry. As 2009 draws to a close, we collectively breath a sigh of relief; acknowledging that the economy and housing markets somehow survived. The convoluted maze of government programs and subsidies, a multi-billion stimulus package and an overly accommodative monetary policy conducted by the Federal Reserve heroically kept the economy from falling into the abyss. For all the criticism directed at government decision making throughout the year, something worked. We are in a much better place today than we were yesterday.

As we enter 2010, the economy is rebounding, the credit markets thawing and the housing sector recovering. After four consecutive quarters of negative GDP growth, the economy grew at 2.8 percent in the third quarter of this year. The manufacturing sector is now expanding as evidenced by the Institute for Supply Management’s manufacturing index posting a 53.6 in November (any number over 50 represents expansion). Similarly, consumers have recovered; retail sales were up 1.3 percent in November and the savings rate has trended upward throughout the year. Even automobile sales improved, inching up to 10.9 million vehicles sold in November compared to a cyclical low of 9.2 million vehicle sales in September. The employment situation has also improved with monthly job losses diminishing every month for the past five months, falling from 463,000 job losses in June to 11,000 job losses in November. And encouragingly, inflation remains at bay with the core consumer price index registering 1.7 percent gain in October of this year compared to October 2008.

The nation’s housing sector closed 2009 on a high note. Existing home sales rose 10.1 percent in October to 6.1 million annualized units, compared to a 12-month average of 4.9 million. New home sales rose 6.2 percent to an annualized 430,000 in October, compared to its 12 month average of 380,000 annualized units. New residential construction (housing starts) rose 8.9 percent in November to an annualized 574,000 units, but is 12.4 percent below its level registered in November 2008.

Housing inventories have improved markedly over this past year. The months’ supply for existing homes fell to 7 months in October, compared to a 12-month average of 9.4 months. Similarly, the months’ supply for new homes fell to 6.7 months in October compared to a 12-month average of 9.6 months. And finally, home prices are showing signs of stabilizing. The median prices for both existing and new homes have been rising on a monthly basis for the past quarter, while median prices continue to fall, but at an increasingly slower pace, on a year over year basis. The median price for existing homes fell 7.1 percent in October from October of 2008, while the median price for new homes fell by only 0.5 percent in October from a year ago.

With the major housing measures-sales, starts, inventories, and prices-exhibiting marked improvement during the second half of 2009, it is likely that housing activity will continue to improve, albeit modestly, in 2010. Mortgage rates are expected to hover between 5.0 and 5.25 percent throughout the New Year, due to an accommodative Federal Reserve and modest inflationary pressures. The economy (GDP) is expected to grow between 2.0 and 2.5 percent next year, providing modest support for home buying. The job market is expected to be relatively weak during the first half of 2010 and then pick up some momentum in the second half.

This modest backdrop for the housing sector is likely to produce an unexceptional recovery. Home sales and new residential construction are projected to climb modestly throughout the year, while inventories are expected to improve with progress constrained by an ongoing foreclosure problem. Home values are expected to decline in the first half of next year, led by Florida, California, Nevada, and Arizona; and post some modest gains in the second half.

Nevertheless, the housing sector is expected to be fragile next year, vulnerable to a pull back in government subsidy programs and/or an onslaught of foreclosures. After a year of unprecedented government intervention, the current housing recovery is largely due to the positive influence of the homebuyer tax credit on home sales and the Federal Reserve’s mortgage-backed security purchase program which has brought mortgage rates down a full percentage point by most estimates. If the government decides to end the homebuyer tax credit and the Federal Reserve security purchase programs sometime next year, it is likely that the housing recovery will face serious challenges.

The homebuyer tax credit which is due to expire in April 2010 has been enormously successful in enticing households to purchase homes, and its elimination is likely to reduce the number of home sales next year. Similarly, if the Federal Reserve phases out its mortgage security purchase program, mortgage rates may eventually rise a full percentage point, raising the costs of purchasing a home. Eliminating government subsidies combined with an uncertain foreclosure situation poses the greatest risks to the 2010 housing outlook.