Forecast 2009: Your Home

The prediction: Prices will fall further before year-end.

Forget the old saw that all real estate is local. What's pummeling housing prices in your nabe is the same thing that's hurting them around the country: the credit crisis.

You know the drill - banks' troubles have made it harder for many home buyers to get mortgages, and those who do qualify have to pay more. A borrower with good credit and a 20% down payment recently got charged an interest rate of 6.7%, on average, according to HSH Associates.

It's true that this rate is not historically high (rates often surpassed 9% in the early 1990s). But it's more than the 6.2% that the same borrower would have paid at the beginning of 2008.

The fact that mortgage rates have remained stubbornly elevated despite the government takeover of Fannie Mae and Freddie Mac leads some experts to believe that those rates are not headed down anytime soon.

Then look at the fact that 18.6 million homes in this country are now sitting vacant, more than at any other time since the Census Bureau began tracking that figure in the 1960s. And that 2.8% of U.S. mortgage loans are now at least three months in arrears, up from 1.4% a year ago. That rate is projected to peak in early 2009.

But if a recession lasts for three-quarters of the year, as some economists are predicting, the number of foreclosures could remain high longer. Add it all up and you have another lousy year for real estate.

Home prices are down 20% nationwide since their peak in July 2006, according to the S&P/Case-Shiller home price index. Economist Nouriel Roubini of New York University, who accurately predicted the housing slide and credit crisis, expects another 20% decline in home prices next year. Patrick Newport of economic forecasting firm Global Insight projects a 15% drop.

The damage will likely hit even areas that have so far escaped many problems, such as New York City. "We don't see the market turning until late 2009," says Newport.

The Wild Card:

If they go so low that investors can start renting out homes for enough to cover their mortgage payments, we could see a wave of people snapping up bargain houses in 2009 - which could push prices higher by the time the next 12 months draw to a close.

Lawrence Yun, chief economist of the perpetually optimistic National Association of Realtors, says he expects prices to rise 2.8% in 2009.

The Action Plan If You're Selling:

In 2010, real estate should be stronger, with fewer homes clogging the market. So if you can wait until then to sell, do it. "I would," says Barbara Brin, a real estate agent in Minneapolis. And if even realtors are saying that...

In many markets, sellers will face the toughest competition not from fellow homeowners but from banks and builders. Both will be willing to cut prices dramatically to sell a foreclosed or new home.

To convince buyers that your house is worth paying up for, make sure that it's in move-in condition (foreclosures almost certainly won't be). Point out unusual qualities like wide-plank floors or stained glass that cookie-cutter new construction lacks.

Go to Zillow.com to see how much nearby homes fetched recently. Once you've figured out what a buyer might pay, price your house 5% below that.

Sound painful? A recent study by a New Jersey appraiser found that houses priced below market ended up selling for more than similar houses listed above market. That's because lower prices attract more buyers.

If You're Buying:

In many areas of the country, such as Phoenix, San Diego and Washington, D.C., it's common for perfectly good homes to linger on the market for six months or more. So start your search by looking for properties that have been up for sale for at least three months: At that point most sellers will be willing to deal.

Drive a hard bargain when you find a house you're interested in. Sellers know you have a lot to choose from. They also know that if they wait they will probably get less. So offer less now.

Barry Miller, a buyer's agent in Denver, suggests you make your first offer as much as 13% below the seller's asking price. "You might not get the house for that, but it's a good starting point," he says.

More than ever, that three-digit number could cost you. Lenders have begun imposing fees for everyone who doesn't fall into the top tier of credit - and that's a whole lot of people.

"Let's say 680 got you the best rate on a mortgage 24 months ago," says John Ulzheimer, a credit expert with Credit.com. "Today you need to shoot for 780 to 820 to get the best deal."

Boosting your credit score from 660 to just 740 can lower your mortgage rate by a quarter of a point. To improve your score, focus on paying down debt, which will bring your crucial debt-to-credit ratio down.