Over the weekend the National Association of Realtors (NAR) announced its expectation that home prices will increase by 4% in 2010 following a projected decline of 13% in 2009. 

NAR is a trade group which exists solely to promote the interest of real estate brokers.  For the entirety of the housing market collapse NAR’s prosticonomist, Lawrence Yun, has generated rosy projections for home prices in defiance of reality.  It is not unexpected that NAR would again promote the idea of purchasing a house, but it is amazing that media organizations continue to regurgitate this garbage as unbiased or substantive news.

Housing prices will fall in 2010 for the following reasons:

Governments Subsidies Will Lose Efficacy and Lapse

First-time homebuyers have accounted for an all-time record 47% of home sales in 2009.  This dynamic is primarily due to the Government’s $8,000 tax credit for such transactions.  The subsidy catalyzed pent-up demand, pushed fence-sitting, first-time buyers into the market and pulled future sales forward into 2009.  While the incentive will continue into 2010, much of the benefit of the program has already been exhausted.  There are only so many first-time homebuyers willing to purchase a home contingent upon Government subsidies.  And as the tax credit is phased out during the year, first-time home sales will evaporate in kind.  If a potential buyer hasn’t already purchased a home with an $8,000 tax credit available, why would they do so immediately after the benefit has lapsed? 

Waning Mortgage Rate Subsidies

Of great import will be the exhaustion of Bernanke’s $800 billion mortgage rate subsidy.  Analysts expect interest rates to rise by as much as 1% during the first half of 2010 as the Federal Reserve halts it open-market purchases of mortgage securities.  Rising rates will materially affect home affordability with the cost of servicing a traditional mortgage rising approximately 15% - 20%.  As the cost of owning/servicing a home rises materially house values will decline.

The Same Problem Which Caused the Crisis Persists

Foreclosures will continue in large numbers throughout 2010 as adjustable-mortgages reset.  As long as there are material numbers of foreclosures on the market, house prices will be under pressure. 

We have seen a recent slowdown in the number of bank-owned properties as Government directives designed to slow home losses have impeded the market-clearing functions.  But the distressed properties still exist, and many will be resolved and enter the market in 2010.  National housing price appreciation in this environment is unlikely. 

Unemployment

The largest contributor to falling home prices may be unemployment.  Today 10.2% of Americans are unemployed and fully 17% are under-employed.  These figures will worsen.  Regardless of Government intervention there will not be a material improvement in unemployment figures during 2010.

17% under-employment represents a huge pool of potential homeowners who will not be buying homes during 2010.  Lack of confidence in the economy or one’s future employment status will hobble another segment of potential buyers. 

Prior to this economic crisis, the primary source of foreclosures had always been high and rising unemployment.  Today we have both.  A large number of foreclosures will occur in 2010 resulting solely from the high unemployment rate. 

The incremental source of distressed properties and falling demand from unemployment bodes poorly for housing prices in 2010.
 
Dismal Reality

2010 will be characterized by high unemployment, record foreclosures, rising mortgage rates and waning federal housing subsidies.  In the absence of new, extraordinary Government intervention or the emergence of rapid inflation, national housing prices will fall next year despite NAR's protestations.