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Home Prices Face Test Without Fed Support


The big question for housing is whether prices will hold up next spring when the U.S. starts to withdraw from the market

The U.S. housing market has been on government life support for much of 2009. Thanks to the feds' bounty of tax credits, purchases of mortgage securities, interest-rate cuts, and home loan programs, new and existing home sales are up. The median home price rose, to $177,900. What happens in 2010 depends on whether the market can stand on its own.

The big test comes this spring. The Federal Reserve says it will stop buying mortgage-backed securities by the end of March, a program that has helped make home loans more affordable and spurred sales. The market may also suffer a setback if the central bank hikes interest rates, as some economists predict. With foreclosures expected to jump, Moody's (MCO) Economy.com estimates home values will fall 7.8% in 2010.

The U.S. also plans to phase out the popular home buyer's tax credit by April. Right now first-time buyers get $8,000 and repeat buyers $6,500. As first-time buyers rushed to capitalize on the credit before its original yearend expiration date, purchases of existing homes surged; in October they were up 23.5% over the previous year to reach their highest levels since February 2007, according to the National Association of Realtors. Colleen and Jim Baldrica took advantage of the government gift when they purchased a three-bedroom rambler on a lake in the Minneapolis suburb of Stillwater for $245,000 this year. The Baldricas, who are planning to use their tax savings to pay for new hardwood floors, hope the credit will make it easier for others to buy the home they've lived in for 21 years.

With the government stepping back, homeowners will have to put their faith in the economy. Whether the rebound in real estate has staying power will depend on mortgage rates remaining low and the unemployment picture improving, says Celia Chen, senior director of Moody's Economy.com: "If everything works according to script, job growth will have kicked in, and we'll be on the way to economic recovery by the middle of next year."

That doesn't mean home values are likely to surge. "Keep in mind, when you reach the end of the bust you tend to have flat prices for years," says David Stiff, chief economist at Fiserv (FISV), a research firm in Brookfield, Wis. The median home price won't turn until 2011, when it is expected to rise only 3.4%, according to estimates from Moody's.

The aggregate numbers, though, don't tell the full story about real estate, which remains highly localized. The former bubble markets, including Arizona, California, Florida, and Nevada, may remain in the doldrums long past the rest of the country. In Phoenix, some troubled borrowers got temporary modifications of their loans through a Treasury program designed to prevent foreclosure. But they may not qualify for permanent workouts if they don't have the paperwork to prove their income or show they occupy the home. Prices in the city could drop another 23% through 2010, according to Moody's Economy.com.

On the flip side, Texas, North Dakota, and Oklahoma, whose local economies are fueled by the energy business, will bottom out before other places. Home prices in North Dakota are expected to remain flat in 2010 while prices continue to fall in the rest of the country, estimates Moody's Economy.com. What follows is a look at four major cities that represent various factors affecting U.S. home prices in both directions.

Gopal writes about real estate for BusinessWeek in New York.

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