RealEstateEconomyWatch.com

Interest rates below 5 percent and prices bottoming out in the first half of the year will drive two of the three main ingredients for buyer affordability to cyclic lows next year, Freddie Mac’s chief economist said yesterday.

Whether buyers will step up to the plate, however, is still anybody’s guess.

“Buyer affordability is at the highest level in decades,” said Freddie’s Frank Nothaft. “With affordability high, many first-time buyers will be attracted to the housing market in the new year, likely translating into more home sales in 2011 than in 2010.”

Though they will rise above their present level, Nothaft expects rates on 30-year fixed-rate loans to remain below 5 percent throughout the year, and initial rates on 5/1 hybrid ARMs will likely remain below 4 percent in 2011.

As for home prices, Nothaft said price indexes for the U.S. as a whole are likely close to bottoming out but local markets with large inventories of for-sale homes and REO properties will continue to see weakness in 2011. “Most experts look for single-family U.S. indexes to bottom out in the first half of 2011, with a gradual (but sustained) recovery after that,” he said.

The National Association of Realtors’ Affordability Index for the third quarter reported one of the most affordable buying markets since the inception of the index in 1971, he noted.

Though conditions for buyers will improve next year, whether buyers are in the mood to take the plunge is another story.  A consumer survey by Fannie Mae over the third quarter found that consumers are less confident about buying a home even though they agree with Nothaft that mortgage interest rates will not go up and prices will continue to decline.

Consumers also are less confident about home prices going up, a home purchase being a safe investment, and their personal finances.

The number of Americans in the Fannie survey who think it is a good time to buy a home dropped to 68 percent (down 2 percentage points since June). An overwhelming majority of Americans (85 percent) think it is a bad time to sell a house.

 A final reason for buyer reluctance is that the perception that buying a home is a safe investment continues to decline among Americans.  In the Fannie Mae survey, buying a home ranked second to putting money into a savings or money market account, and ranked just 1 percentage point ahead of putting money into an IRA or 401(k) plan.