RealEstateEconomyWatch.com

Housing activity is expected to be brisk in the New Year according to Fannie Mae’s recently released December Housing Forecast.

The mortgage giant predicts that home sales and new residential construction will boast double digit gains in 2010 compared to a disappointing performance in 2009. According to the forecast, existing home sales are expected to rise by 10 percent next year, compared to an estimated 3.1 percent gain this year, while new home sales are projected to rise by 26 percent in 2010 compared to an estimated 19 percent drop in sales this year. Similarly, new residential construction is expected to increase 35 percent in the New Year compared with a 38 percent drop in starts in 2009.

Fannie Mae’s upbeat forecast for the nation’s housing sector is consistent with the positive way housing activity ended this past year. The housing sector scored a trifecta in October-home sales were up; home inventories were down; and home values were stabilizing. Existing home sales surged10.1 percent to 6.1 million annualized units in October compared to a month earlier, while new home sales gained 6.2 percent to 433,000 in October, representing the strongest pace since the fall of last year. More encouraging was that the months’ supply for existing homes posted a cyclical low of 7 months in October, while the months’ supply for new homes registered a cyclical low of 6.7 months.

The median price for existing homes fell 7.1 percent in October compared to October 2008, but it was the second consecutive month where the decline was in single digits. More heartening was the meager 1 percent decline in the median home price in October compared to September. The median price for new homes fell only 0.5 percent in October from a year earlier.

According to its 2010 forecast, Fannie Mae expects home values to remain relatively weak next year, predicting a 0.2 percent drop based on the Federal Housing Finance Association (FHFA) home price index, compared to a meager 0.5 percent drop in the FHFA home price index this past year.

Although the housing sector is expected to rebound sharply in sales and housing starts in 2010, the mortgage giant predicted bad news for mortgage lenders, estimating that mortgage originations would decrease 33 percent by the end of next year. The company notes that the primary reason for a large drop off in the origination business is attributed to a projected 52 percent plunge in refinancing transactions compared to this past year, due to rising mortgage rates. Mortgage rates are expected to average 5.14 percent in 2010, compared to an estimated average of 5.03 percent this past year.

There remain serious risks in predicting a successful housing market recovery. Foreclosures are expected to mount over the next year or two because of rate resets on option ARM and interest only mortgage loans. Foreclosures add to housing inventories, which could slow the recovery. In addition, the homebuyer tax credit which is due to expire at the end of April, has been effective in enticing households to purchase homes during the past several months. If Congress does not extend the credit (again), the momentum in home sales could stall sometime next year.