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First, the good news: home sales have stabilized over the last seven months and should increase slightly in the second half of 2008, NAR Chief Economist Lawrence Yun told a crowd of REALTORS® at NAR’s Midyear Legislative Meetings & Trade Expo Thursday.

The other good news is that the subprime lending crisis is becoming a thing of the past. “I believe 2008 will be the year when we have to clean up and recover from the subprime mess,” said Yun.

The bad news is that the numbers are in, and 2007’s annual sales volume of about 5.30 million homes was the lowest in 10 years. Luckily, the economy is stronger overall than it was a decade ago. “The difference is that we have 25 million more people and 13 million more jobs than we did 10 years ago,” he said.

And while sales should begin to grow later this year, real improvement in the housing market won’t happen until 2009, when sales should climb to 5.71 million units, Yun said.

Price Gains to Vary by Market

Prices also are expected to begin a turnaround later this year, although recovery will vary by market.

Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas City, Mo., area – are likely to experience home price gains in the 20 to 30 percent range over the next five years, while markets like Miami, Las Vegas and Phoenix could see prices go up as much as 50 percent during that time period, Yun said.

Healthier Mortgage Market Makes a Difference

A brighter credit picture is a major contributor to this improvement, Yun said.

If you look at where home prices fell the most, it’s the markets were subprime loans were prevalent,” Yun said. Cape Coral, Fla.; Detroit; Las Vegas; Miami; Orlando, Fla.; Phoenix and Riverside, Calif. were among the cities with a high percentage of subprime lending and where the markets suffered the biggest downturns, he explained.

These markets should get a boost from a more stable mortgage market. FHA lending doubled to 6 percent of all loans 2007 and should grow to 10 percent in 2008. It should reach near-historic norms of 15 percent in 2009, said Yun.

The increase will be slow because many lenders will have to be certified by the U.S. Department of Housing and Urban Development before they can issue FHA mortgages. Higher conforming loan limits at Fannie Mae and Freddie Mac have also helped lower interest rates and unlock the lending log jam for jumbo loans.

Even current borrowers with adjustable mortgages are in better shape, thanks to Fed rate cuts. In fact, some adjustable loan borrowers may actually see their resets produce lower payments. “The Fed has done its job on resets; now it’s up to Congress to encourage the home buying that will help stabilize prices,” Yun said.

Other Reasons to Be Optimistic

The home buyer tax credit currently being considered by Congress would also encourage uncertain buyers to act. Stabilized prices will not only encourage sales but could help reduce defaults, he added.

The foreclosures aren’t all in the past, warned Yun, though he believes that many investors and speculators already have exited the market. He expects foreclosures to rise throughout 2008 and perhaps into 2009, primarily among subprime borrowers, where foreclosure rates were near 20 percent in the third quarter of 2007.

Still, Yun notes, it’s important to remember that only 9 percent of home owners have subprime loans. Foreclosure rates for all loan types are much lower — currently, around 2 percent.