By Jodi Summers

Economists generally agree that although the national housing market may not have reached bottom just yet, the residential real estate downturn will be slight, with a recovery beginning in the second half.

“We’re going to hit the trough in the first half of 2007,” predicts Frank Nothaft, chief economist for Freddie Mac.

On a national basis, home sales contracted by about 9 percent in 2006, to 6.5 million units from about 7.1 million units in 2005, according to National Association of Realtor statistics. Inventories rose about 36 percent to 3.8 million units available for sale nationally in mid-2006 from about 2.8 million units at the end of 2005.

In Los Angeles County, reports DataQuick Information Services, median home prices rose 2.6 percent to $510,000 as sales fell 18.9 percent. San Bernardino county saw a median price rise of 8.6 percent to a record $380,000, while sales declined 26.7 percent. Riverside County, where the median price rose 5.2 percent to a record high of $426,000, with sales down 35.7 percent. In San Diego County, the median price fell 6.9 percent to $482,000, as sales fell 24 percent. Ventura County saw housing prices falling 8.2 percent to $562,000 with sales sliding 30.8 percent. Orange County property saw no appreciation — the median residential property price of $616,000 is the same as 2005. Sales dipped 29.3 percent.

In the California real estate market, existing-home sales fell about 23 percent in 2006 compared to 2005, confirms Leslie Appleton-Young, chief economist for the California Association of Realtors. She predicts another 7 percent decline this year.

“Affordability plummeted from late 2005 through 2006,” Nothaft notes. “We saw an affordability crisis in high-cost markets across the country.”

Affordability is at the core of the current downturn. Past housing slumps were the result of a slowing local economy. U.S. economic fundamentals remained solid, with 3.3 percent growth in the gross domestic product, job gains average about 150,000 a month, and interest rates have remained low. Wages rose 4 percent in 2006.

Home sales have suffered because rapid price appreciation, and higher interest rates have pushed people out of the market.

“Homes were no longer a bargain,” says Celia Chen, director of housing economics at Moody’s Economy.com.

A slight decline in prices makes it possible for more potential buyers to transact. NAR Chief Economist David Lereah estimates that for every 1 percent reduction in price gains, some 50,000 more buyers will return to the market.

On a nationwide basis, NAR predicts that existing single-family sales will dip slightly to 6.4 million units in 2007 from an estimated 6.5 million in 2006. Price growth will stay relatively flat, inching down to 1.7 percent in 2007 from an estimated 1.9 percent for all of 2006.

“The good news is, the bad news is mostly behind us,” says Lereah.

“If there is a downside risk, the risk is not of a slowing economy — the risk is of inflation,” observes Susan Wachter, professor of real estate and finance at University of Pennsylvania and co-director for the Institute for Urban Research at the university’s Wharton School. “If interest rates rise significantly as a result, there is a threat of growing mortgage default rates and even recession.”

Lereah predicts that sales in many markets around the country will rise in 2007 and get on track for a full turnaround in 2008. He points to steadying mortgage interest rates, the top-out of home inventories, and declining new-home production as indicators that many markets are reaching a sustainable sales pace.

“Although some monthly declines are possible, when we look at the forecast for existing-home sales in 2007 on a quarterly basis, we see gradual improvement over the course of the year,” Lereah said. “That will support future price appreciation as inventories are drawn down.”

“Population-wise, we crossed 300 million people this year, and we’re getting 3 million people a year,” points out Kenneth Riggs, CRE, president and CEO of Real Estate Research Corp. “Many of these people are getting jobs, they have the money to buy, and they have to live somewhere, so the trends are favorable for real estate across the board.”

“People still have to live somewhere,” Wachter concludes. “We’re going to be surprised about how prices actually hold up in this market.”

Jodi Summers negotiates investment properties for Sotheby’s International Realty. For your real estate needs, e-mail Jodi Summers at jodis@verizon.net, or call (310) 260-8269. Visit her Web sites at www.SoCalInvestmentRealEstate.com or www.santamonicalandmarks.com.