It may not be the news homeowners, contractors and real estate agents want to hear, but economists continue to predict further declines in home prices will prevail throughout 2007.

In November, Washington County reported the first decline in average home prices in Northwest Arkansas after 11 months of price increases despite oversupply and sagging sales.

“The market must continue to work through the oversupply that has been building for the past two years. We simply can’t absorb all the product available and soon to come through the pipeline overnight,” said Kathy Deck, director for the Center for Business and Economic Development at the University of Arkansas.

The inventory surplus reported in the last Skyline Report rose by 22 percent from the year before to almost 3,000 homes completed and unoccupied.

Deck predicts the oversupply will put additional downward pressure on prices with single digit declines lasting through 2007 and into 2008.

Moody’s Economy.com, a private research firm, projected that the median home sales price will drop this year by 3.6 percent — the first decline for an entire year in U.S. home prices since the Great Depression.

In Northwest Arkansas, Moody’s analyst Acharya Yubraj predicts a price decline of roughly 2 percent on fewer sales in 2007 as compared to 2006 based on data collected by the National Association of Realtors and the Office of Federal Housing Enterprise Oversight.

David Wyss, chief economist with Standard & Poor’s, forecasts a 3 percent decline in the nation’s housing prices from the fourth quarter of 2006 to the same period in 2007.

“Nationally, the big bang in sales is over and don’t expect it to recover until late this year or early next year and prices are not done falling — they will contract more,” Wyss said.

He explains there are three basic phases in a housing downturn and each local and regional market is experiencing various stages of the three-year downturn.

Phase I is “Denial.” During this first year prices keep going up despite falling sales, Wyss said.

“People just refuse to sell at lower prices and that usually lasts about a year,” he added.

Phase II is “Anger.” In this phase, oversupplies build, people can’t sell and prices come down while building slows. This can cause further economic fallout when people stop or slow the building rate, Wyss said.

Phase III is “Acceptance.” Wyss said this occurs when the unsold inventory is cleared out.

On a positive note, another factor affecting how fast a local market recovers includes employment.

“When jobs are being created, the unsold inventory will be absorbed faster,” Wyss said.

Larry Kelly, a vice president for the Arkansas Realtor’s Association, sees the Northwest Arkansas area recovering by the spring.

“I think we are addressing the oversupply by less building and while prices may flatten out in the coming months, I think in the spring we will see a different market,” Kelly said.

For those who are in still in the market to purchase a home, Wyss said don’t wait too long.

While prices are likely to slide a little lower, he predicts higher long-term interest rates will be a reality toward the end of the year.

The future of metropolitan Phoenix’s housing market comes down to investors. Again.

These speculative home buyers hyper inflated prices in 2005 by at least 25 percent with their purchasing sprees, new research shows. And what they do this year will determine whether the Valley’s housing market sags, keeps climbing or stabilizes.

Forecasts call for everything from a 10 percent increase in Valley home prices to a 10 to 15 percent drop.

“In a normal housing market without the froth that investors brought, Valley home prices wouldn’t have climbed nearly as high,” said Jay Butler, director of the Arizona Real Estate Center at Arizona State University Polytechnic. His research indicates that the median price for an existing home would have likely hit a high of $205,000 last year, rather than the $263,000 it peaked at in September.

Population and job growth have been the key indicators of metro Phoenix’s economic growth in the past, but this year, what home investors do will be another important trend. Because housing is the Valley’s biggest industry, the area’s economic growth will slow if housing does.

“Phoenix is going to burn off some investors during the first half of this year,” said John Burns, a national real estate consultant. “We will see how many investors can’t hang on and need to sell. As long as a bunch don’t start dumping, the market will be all right.”

Investors accounted for at least 25 percent of all Valley home buyers last year, according to property records and real estate agent reports.

But some economists think the figure is even higher. Frank Nothaft, chief economist for mortgage giant Freddie Mac, said investors accounted for 30 to 35 percent of all home sales in metro Phoenix last year. Nationally, the rate was 23 percent. Las Vegas, where investors have started to pull out and cause home prices to dip in some new neighborhoods, had a higher rate than the Valley.

If investors slash home prices to sell, there will be pressure on all Valley home prices. A glut of houses on the market also will cut into demand for new homes, which will affect building and construction jobs.

As home prices have flattened, many investors have tried to find renters instead of buyers for their properties. If people keep moving to the Valley as projected, most investors should be able to find people to lease their homes.

A slowdown in home-price increases isn’t necessarily bad because it keeps metro Phoenix from following California cities such as San Diego and San Francisco, which are losing jobs and residents because of high housing costs.

Most market watchers believe the most-speculative investors have already cashed out of metro Phoenix’s housing market, moving on in search of the next big deal. The number of home buyers acknowledging that they are buying houses as investments fell in December. The percentage of new homes selling to investors dropped from a high of 11 percent last January to 5 percent at the end of the year, according to the Information Market, a Phoenix-based data firm. About 18 percent of all used homes were selling to investors in December, compared with a high of 20 percent in September.

Last spring, at the peak of the investor frenzy in the Valley, home sellers were getting multiple offers, and many were above appraised values. First-time buyers, fearing prices would keep climbing, jumped in and used all types of creative mortgages to afford a home. Homes priced right were selling in days.

Then, late last summer, the frenzy started to subside as investors began to sell. Deals for overpriced homes began to fall through as some investors started looking to other regions for affordable homes with big appreciation potential or they abandoned real estate altogether in favor of the stock market.

Valley home listings have climbed from a low of about 6,000 in February to 30,000 now. Prices dipped in some areas late last year as the number of homes for sale rose. Now, it’s taking at least 10 days longer for houses to sell than it did a year ago.

As investors cash out of the housing market, it could slow even more, according to a forecast this month at the National Association of Home Builders conference in Orlando.

Not all investors are the stereotypical out-of-state buyer purchasing three or four Valley homes with small down payments all at once, often without even seeing them. Many locals tapped equity in their own homes to buy others, often using interest-only or other adjustable-rate mortgages. Other investors bought one home to live in but counted on the property to appreciate quickly so they could sell.

“Speculators bid up home prices beyond economic fundamentals,” said Marshall Vest, an economist and director with the Economic and Business Research Center at the University of Arizona’s Eller College of Management. “Long-term investors don’t bring that type of problem because their purchases aren’t as volatile.”