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Originally published Saturday, December 26, 2009 at 1:04 AM

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Tax credit fuels home-sales bounce, but will it be just a blip?

The first-time homebuyers' tax credit helped resuscitate the Seattle real-estate market in 2009. The market remains fragile, most insiders say, and the outlook for late 2010, after the credits are scheduled to expire, is especially murky.

Seattle Times business reporter

In residential real-estate annals, 2009 probably will be recorded as the Year of the Credit.

In February, Congress approved an $8,000 tax credit for first-time homebuyers in hopes of kick-starting moribund home sales.

"It worked," Lennox Scott, chairman and CEO of John L. Scott Real Estate, said at a recent industry forum. "That's what completely activated the market."

It sprang to life in the spring. After nearly two years of declining sales, buyers bought 20 percent more houses in King County between June and November than during the same six months in 2008.

Was that a blip, or the start of a trend? That's what real-estate insiders are asking as they gear up for 2010.

Last month, Congress extended the credit, which was due to expire Nov. 30, for seven months, and adopted a new, $6,500 credit for many repeat buyers. Partly because of those incentives, many observers anticipate more houses will be sold during at least the first part of 2010 than in the same months of 2009.

But that's not necessarily saying much: sales volumes last winter were dismal. The market remains fragile, most insiders say, and the outlook for late 2010, after the credits are scheduled to expire, is especially murky.

"We still have a bit of a ways to go to figure out how to get out of the pickle we're in," said George Rolfe, director of the University of Washington's Runstad Center for Real Estate Studies.

Here's a look back and ahead:

Home prices

After plummeting 20 percent in 18 months from its summer 2007 peak, the median price of a single-family home sold in King County slipped only slightly more in 2009.

It was $382,500 in January and dropped to $370,000 in November, according to the broker-owned Northwest Multiple Listing Service.

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And next year? "They're not going to go up," Jill Wood, Windermere Real Estate president, said of home prices. "They've probably leveled off for now."

Even that assessment may be optimistic, others say. Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, said it's more likely that prices will continue to decline through midyear.

The asking prices for some more expensive homes will start to drop, he said, as owners hit hard by the recession anticipate resets of their option adjustable-rate mortgages and inch closer to delinquency.

But houses above $400,000 such in close-in, desirable neighborhoods as Ballard and Green Lake should fare well because there's little available inventory on the market there, said Steve Tolliver of Yucon Appraisal Service

Tim Ellis, editor of the Seattle Bubble real-estate blog, said median prices in Seattle could slip another 3 to 8 percent next year. But all bets are off if the federal government steps in again, he added.

"More and more, it's becoming evident that the government is really interested in keeping home prices from falling farther," Ellis said.

And 2010 is an election year. "Who knows what they may try to pull out of the hat," he said.

Home sales

The first-time buyers' credit wasn't the only reason sales surged in 2009. Even without it, lower prices and record low interest rates probably would have led to an increase, Ellis said.

But the credit clearly was a catalyst. Crellin said his center's research suggests it was responsible for nearly one-third of all the sales in the state in July, August and September.

The question now is, how many prospective buyers remain? "Were we stealing future demand?" Seattle land-use economist Matthew Gardner asked at a recent forum.

Crellin doesn't expect the surge the credit induced to continue unabated. Before the tax break was extended and expanded at the last minute, the real-estate industry did an effective job before then of persuading prospective buyers they had to close by the end of November to claim it, he said.

So most first-timers who intended to buy probably already have, Crellin said. And the chain reaction you'd normally expect from the surge, with sellers of entry-level homes looking to move up, could be weaker than usual, he added.

Some sellers were banks: Nearly 16 percent of all the homes sold in the King, Snohomish and Pierce counties in October were foreclosure resales, according to Seattle-based Zillow.com.

And, thanks to the downturn in prices since 2007, many sellers had little or no equity to use for anything new, Crellin said. Some are renters now.

But he still expects home sales will exceed last year's numbers at least through March.

Windermere's Wood anticipates strong sales through midyear — in part because of the tax credits that expire June 30, in part due to "the sense of confidence people have now." The typical December slowdown hasn't materialized this year, she said.

As for the second half of 2010, "I have absolutely no clue," Wood said. Much depends on interest rates and the stock market's performance, she said.

"It's all going to come down to jobs, jobs, jobs," said James Stroupe, a Windermere condo specialist. "There are a lot of buyers out there that are still scared."

Foreclosures

They aren't as commonplace here as in Florida or Las Vegas or Phoenix, and it's highly unlikely they ever will be. Still, the number of foreclosures in the Seattle area could rise in 2010, sending ripples through the market.

About 2.2 percent of all loans in Washington were in foreclosure in the third quarter, according to a Mortgage Bankers Association survey. That's about half the national rate.

But another 3.2 percent of Washington loans were 90 days or more past due. They could be foreclosures-in-waiting unless government loan-modification programs reach more homeowners, observers say.

And if those homes are foreclosed and later put up for sale at bargain-basement prices, they could push the entire market lower, Ellis said.

There's already a substantial "shadow inventory" of homes that lenders have repossessed, but haven't yet listed, said mortgage banker Jeff Bell of Cobalt Mortgage in Kirkland. Their disposition could affect the broader market as well, he said.

But Wood said she's more concerned about the impact on prices of "short sales" — sales for less than the owner owes the lender.

Mortgages

Interest rates dropped below 5 percent at times in 2009, and observers don't see how they can fall any farther. Some expect them to remain where they are; others forecast modest increases.

Bell expects rates will remain relatively flat for at least the first half of 2010, and probably the entire year. The Federal Reserve has given no hint of increases anytime soon, he said, and "we don't see economic conditions changing to the point where it would warrant higher interest rates."

Crellin expects rates will rise. But that could be good for sales, he said, because it would spur some prospective buyers to act while they still can.

Renting

It's a good time to be a tenant, said Tom Cain of Apartment Insights Washington, a research firm.

Vacancies rose and rents slipped in 2009. Expect more of the same in 2010, he said.

On top of the economic downturn and high unemployment, which depress demand, 3,300 new apartments in complexes of 50 units or more are under construction and likely to be completed next year.

That's in addition to 5,600 units delivered through the end of November this year. "That's a huge supply relative to what we've seen in the past," Cain said.

Next year would be shaping up as a downer for landlords even without all the new product, he added. While some former homeowners are becoming renters, he said, many renters are buying condos and houses, enticed by lower prices, low interest rates and the new federal tax credits.

But most buyers have learned to approach real estate differently now than they did before the crash, said the UW's Rolfe.

Before the collapse a "lottery-ticket mentality" prevailed, he said: "Most home buying for five, maybe 10 years was motivated by the anticipation that you were going to get rich.

"That seems to have been wrung out of the market now."

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

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