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Related topics: homes, home buying, home selling, home prices, Liz Weston

Economists have made a hash of forecasting real-estate markets lately. Most failed to call the peak in home values, and many predicted we'd be in recovery mode by now.

Instead, home prices fell 3% in the first quarter, the steepest drop since late 2008, according to real-estate website Zillow.com.

"Economists are trying to get at the underlying supply and demand (for housing), which hasn't been easy," said Zillow.com chief economist Stan Humphries, who now predicts a 7% to 9% drop this year, with no bottom nationally until 2012 "at the earliest."

If the experts don't know what's next, it may be too much to ask the rest of us to figure it out. Still, a lot of people would like at least an educated guess about whether prices in their area will keep falling, including:

  • Potential homebuyers who want to know if they should wait to get a better bargain.
  • Home sellers concerned about whether they should delay their sale or grab what they can now.
  • All those homeowners who are "underwater" -- more than one in four homes with a mortgage is worth less than its loan -- who wonder how much worse it can get.

Liz Weston

Liz Weston

I can't give you a crystal ball, but I can point you to some of the indicators you can examine to see what might be next for your local market.

First, the obvious: Real-estate markets vary widely, and even neighborhoods in the same area can lose or gain value at different rates. But some factors -- what economists call macroeconomic trends -- affect markets pretty broadly, so you'll want to keep them in mind. Such as:

"External" forces. Plenty of factors can interfere with normal supply and demand. The federal first-time-homebuyer tax credit, for example, helped to boost demand for homes across the country. Once it expired, home prices, which had been on the rise in many areas, tanked again. The most recent S&P/Case-Shiller indices showed prices in February once again approaching their April 2009 lows. There's not much support for renewing the credit, though, so don't expect Uncle Sam to ride to your market's rescue.

Meanwhile, various moratoriums on foreclosures have slowed down the normal process that would have ushered these homes onto the market, leading to an overhang, or "shadow inventory," that economists worry could further depress prices.

Lending standards. Stricter lending standards also have taken a toll, making it harder for potential buyers to get loans. Just as loose lending standards helped inflate the bubble, tighter lender criteria helped deflate it. You can track general trends in lending standards by checking out the Federal Reserve's Beige Book, which monitors economic trends in its 12 districts across the country. If you see indications that lenders are loosening up, it could be good for home prices. Even-tighter standards, not so much.

Interest rates. This is the macroeconomic trend most likely to make a broad difference in the coming months. Rates are still well below historical norms, and that has helped make homes more affordable, propping up what little demand there is. If rates rise very much, that could change.

"It's reasonable to expect that we will be looking at higher interest rates soon," said economist Dean Baker, a co-director of the Center for Economic and Policy Research and author of "False Profits: Recovering From the Bubble Economy." "And that will be a depressing factor on home sales."

Even if macroeconomic trends turn against real-estate markets in general, your market could be one of the exceptions -- or it could be one that suffers more than most. Here are some signs to check to see if housing prices in your area will keep falling:

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Employment. High or growing unemployment is a worrisome sign for your area's general economy, but the more important figure to examine is job growth. If your area is creating jobs, demand for homes is more likely to grow. Similarly, your area may have lower-than-average unemployment but still have dismal prospects because the job market is stagnant or shrinking, and people are giving up looking for work or leaving for better prospects. You might want to peruse "Best Cities for Job Growth 2011," prepared for Forbes magazine by two professors at NewGeography.com, to see where your city ranks.