By John W. Schoen Senior producer
updated 1/25/2007 6:34:39 PM ET 2007-01-25T23:34:39

The final housing numbers for 2006 are in, and they confirm what anyone who bought or sold a home last year has suspected: It was the worst housing slump in nearly two decades.

The freshest numbers also provided tea leaves for the more pressing question: has the housing market bottomed out yet — or will prices slide further before the market recovers?

After a historic five-year boom propelled by a strong economy and low interest rate, the real estate market went bust in 2006, according to the final tally released Thursday by the National Association of Realtors. Sales of existing single-family homes fell 8.4 percent to about 6.5 million, the biggest annual decline since a 14.8 percent drop in 1989.

Like everything in real estate, a lot depended on location, location, location. The West — which had seen outsized gains during the boom — was hit hardest by the slump, with sales off nearly 16 percent last year. Sales in the South were down 7 percent, while the Midwest and Northeast saw sales fall nearly 6 percent for the year.

Double-digit price gains that sparked a frenzy of condo flipping and speculative building also came to an abrupt halt last year. The median price of an existing home rose just 1.1 percent last year — less than inflation — compared with 12.4 percent in 2005.

Those numbers have driven away much of the quick-buck crowd that loaded up on unbuilt condos and helped fuel the rapid rise in prices. In 2005, some 40 percent of the market represented investment or second-home purchases. Comparable figures for 2006 were not yet available, but the departure of those investors should help stabilize the market, according to David Lereah, chief economist at the National Association of Realtors.

“With fingers and toes crossed, it appears that we have hit bottom in the existing-home market,” he said.

The trade group's official forecast calls for a 1.2 percent drop in sales of existing homes this year and a 1.5 percent increase in the median price.

Some market watchers note that at 6.5 million sales a year the pace of homes sales is still strong by pre-boom standards. And there are signs that the slump is easing, if not reversing course. Brian Wesbury, chief economist First Trust Advisors, notes that lumber prices, mortgage activity and some homebuilder stocks have begun to pick up.

“It looks to me as though maybe we haven't reached the complete bottom yet, but we're in the bottoming phase right now,” he said.  

But the latest data don’t help forecasters much. Since July, the median price of existing homes has trended lower, but it ticked up slightly in December. And while sales volume began perking up in late 2006, a 0.8 percent drop in last month has some analysts rethinking the notion that the market had bottomed out.

“I still think there's further downside risk,” said Richard Berner, chief U.S. economist at Morgan Stanley. “And the reason is that it has become a buyer’s market with the imbalance between supply and demand both for new and existing homes out there.” 

The supply of unsold homes — which soared to more than seven months worth of inventory for single-family homes from four months at the start of 2005 — has come down a bit. But it’s not clear whether the market is getting back on its feet or sellers have decided to pull their homes off the market and try again when the market improves.

“We could see inventories go back up again in the existing-home market when people come back into the marketplace in the spring,” said Berner. 

Economists have long taken housing sales and construction statistics for December with a big grain of salt. For one thing, the data are seasonally adjusted from a relatively small base, which tends to amplify monthly trends. The real test usually doesn’t come until spring, when the start of the season typically brings new buyers and sellers to market.

The good news is that — unlike some past housing slumps — this one doesn’t look like it’s going to drag the overall economy down with it. Unemployment remains low, consumers seem to be weathering the housing downturn reasonably well, and interest rates are still in check.

“While there is no denying that housing will continue to act as a drag on real GDP growth in the opening half of this year, the housing market whirlpool will not drag the rest of the U.S. economy down with it,” said Stuart Hoffman, chief economist at PNC, in a note to clients Thursday.

The strength of the housing market, in turn, depends on a strong economy generating new jobs and rising wages for potential home buyers. Any rebound will also depend on a continued of low interest rates and relatively easy credit.

That could change if consumers don’t get a handle on record levels of debt. With some borrowers in over their heads and a rise in credit delinquencies, mortgages may be harder to come by, especially among lower-income home buyers, said Berner.

“What I worry about is that some of the lenders may start to pull back and make housing a little less affordable for people at the fringes of the marketplace,“ he said.

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