Reports this week showed that home sales increased by about 10% year-over-year in October, one of the best showings for home sales in several years.  Yet, home prices only improved slightly.  Worse yet, many economists are predicting that home prices will continue to decline through 2010. 

According to Fiserv, a financial information and analysis firm, the national median home price is predicted to drop by 11.3% by June 30, 2010.  Mark Zandi, chief economists with Moody’s Economy.com believes that this assessment is directionally correct. “I think more price declines are coming because the foreclosure crisis in not over”, he said.

However, these forecasts contradict the S&P/Case-Shiller Home Price Index which shows that nationally home prices have increased by 3.6% in May, June and July.  Economists predicting further decline argue that this was a temporary condition partially caused by artificial government stimulus.

Regardless of the direction of the real estate prices, the question that really matters is: “How does it impact me?”  If you are one of the millions of homeowners who are underwater (meaning, they owe more on their mortgage than their house is worth), it may matter to you if you are having trouble making your monthly mortgage payment.  But if you plan on staying in your house for a long period of time, as long as you can keep making the monthly payments, the short-term gyrations of the real estate market should not matter that much to you.  In the long-term, staying put and making your monthly payments is a sound decision that will help you build equity – keep in mind that in the long-term, real estate values should rise, and the underwater condition should only be temporary.

If you are in transition, meaning, moving from one house to another, real estate prices are basically irrelevant unless the condition of the market you are moving to are much different than the conditions of the market you are moving from.  You will not get as much for your house as you would have a couple of years ago, but you will make up for it by paying less for your next house.

If you are a first-time home buyer, current prices may make it more affordable for you to own a home.  When you consider the low interest rates, government tax break, and very low prices, there couldn’t be a better time to be a first-time home buyer.  Even if the home prices don’t bottom until sometime next year, you are likely getting a great deal given the historically low interest rates and extra government stimulus.  If you try to time prices perfectly and wait until you find the bottom (if that can ever be done) you may not come out ahead due to potentially higher interest rates or to missing out on government incentives.

Stories about median national home prices are great for water cooler conversations.  But the nature of real estate is such that only the local market conditions where you live or intend to live are what really matter, and those conditions can be very different than the national average. 

Most importantly, where you stand in terms of your real estate needs is a lot more relevant than what is happening with the markets.  If you are under financial pressure to sell your home, then the current market conditions are definitely not on your side.  If you are upgrading in the same market, prices may not matter at all.  They same is true if you have been in your home for a long time and are not planning on moving anytime soon.  On the other hand if you are a first-time home buyer, this may be a great opportunity.