Housing Market Crystal Ball

The nation's housing market cooled considerably in 2006, as existing home sales fell by the largest amount in 17 years — 8.4 percent. This marked a drastic turnaround from 2005, when existing home sales hit an all-time high.

"While the 8.4 percent is the worst performance in 17 years, it's not as bad as many economists have feared," Lou Dobbs, anchor of CNN's "Lou Dobbs Tonight," told The Early Show co-anchor Julie Chen. "There is a suggestion that we could see this market bottom out this year; economists are certainly divided on their views on that. But we at least have the opportunity here for a soft landing.

"And what looked like it might be a simple bubble bursting, and a real recession in housing. It's not likely to get much better this year, in my opinion, but that's better than what many expected," Dobbs added.

The National Association of Realtors predicts that sales have bottomed out and will slowly rebound in 2007. However, other analysts caution that any rebound will be very slow because it will take time for the glut of unsold homes to diminish. Many experts also believe that prices will continue to fall in formerly red-hot markets such as Florida, California, Arizona and Nevada.

The Wall Street Journal took a look at 28 of the country's major real-estate markets and found that the inventory of unsold homes at the end of 2006 was up substantially in nearly all of the markets from the already plentiful level of a year earlier. The biggest increases were in the following metro areas: Tampa, Miami, Orlando, Portland and Orange County, Calif.

The Journal concluded that buyers have the upper hand in the current market and that sellers should expect buyers to a) take their time when home shopping and b) to be tougher negotiators than in the past. Also sellers will face increased competition from home builders who are dangling incentives such as kitchen upgrades to sell their newly built homes.

However, there is some good news for buyers as well: Unemployment remains low, wages are increasing, energy prices have fallen and mortgage rates remain low. This makes it a favorable environment for buyers and will hopefully encourage more buyers to break into the market, boosting real estate out of its current slump.