When house sales were booming, I posted a few updates in July and August using the National Association of Realtors (NAR) data. Both July and August showed an increase in sales numbers. August was an upsetting month because the increase wasn’t as high as people expected.

After ignoring the real estate market for a few months, I  want to take a look at it and see how the market is doing. Are things getting better? Worse?

Volume, Contracts Signed Decreases

So, in November (data released in December), people signed 16% fewer contracts than in October. This was the first decrease after 9 months of constant gains. This was unexpected – a decrease of 2% was forecasted.

Why do people think there was a decrease?

"People took a breather," said David Crowe, chief economist for the National Association of Home Builders.

NAR chief economist Lawrence Yun blamed the fall on the scheduled end of the first-time homebuyers tax credit, which refunded up to $8,000 in income taxes for qualified homebuyers. The credit initially was to lapse on Dec. 1, but Congress extended it through the end of June.

This makes perfect sense. People scrambled to sign their contracts as quick as possible towards the end of summer. Thinking that the credit ended on December 1st, most people who were in the market to buy a house had already closed on their home mortgage before November.

During November, there were still house sales, of course, but not as many as before. Not many people were trying to procrastinate with $8,000 on the line.

Compared with a year ago, sales are still up about 15%, though.

Home Prices Heading South

Interestingly enough, as demand for housing falls, so do the prices. (Typically a supply-demand graph would show the demand increasing as prices fall, unless we are still watching a market correction, at which point demand won’t pick up until the prices fall enough)

Since May, prices have increased 3%. But most forecasts have prices falling in 2010.

Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%.

Why do the forecasts predict this?

Foreclosures On the Way

Moody’s thinks a lot more foreclosures are in the pipeline due to the shortcomings of the mortgage modification programs. Trial modifications aren’t being made permanent and a lot of the completed modifications are re-defaulting at high rates.

The price drop due to foreclosures should be no more than 8% according to Moody’s and of that decline, most will be in states with high foreclosure rates like California, Arizona, Nevada, and Florida.

Aside from the people already facing issues, a lot of the people who purchased with an ARM (adjustable rate mortgage) are going to see their payments increasing in the near future. They may be fine now, but once the payment increases, we may see more people in trouble.

Then there are the people who deliberately walk away. They are the people who look at their house as an investment, see that they are $100,000 under water, and decide they would be better off filing for bankruptcy.

Interest Rate Increases

Currently, interest rates are incredibly low. However, some analysts such as Pat Newport of IHS Global Research think that rates for a 30 year mortgage will pass 6% as the government pulls back support for the housing market.

If you want to keep up to date with current mortgage rates, Quicken Loans has an easy to use layout. I like it because I can search by state and it will give me more local results with tax and insurance estimates factored in.

March will mark the end of the Federal Reserve purchasing government-backed securities, which will add to the upward pressure on rates.

End of the Tax Credit

Just as the tax credit affected the volume of sales, it also has an affect on the pricing.

Because of the fact that the credit acts as a dollar for dollar credit, there is a huge incentive to buy a house if it’s on your to-do list. If the credit has the (predictable) affect of pushing sales up by a few months, then demand will decrease substantially once the credit ends.

This decrease in demand will then lead to decreased pricing.

Tough Times Ahead, Or a Rising Market?

Is the market recovering? Is it going further down into the rough?

Only time can tell. I think the biggest mistake you can make, though, is treating your HOME like an investment. You wouldn’t gamble with your kid’s college education, don’t risk the house you live in.

If you’re in the market, now may be the best time to buy. Or your house could possibly go down in value further. But at least you’d be in a better situation than if you had purchased a year or two ago!