Finally, an end to the sharp drop in home values

Zillow, the real estate home-price research company, says the value of residential real estate ended its sickening drop in 2009. The firm's chief economist writes: "Total home values in the United States fell $489 billion in the first 11 months of 2009. A large drop, to be sure, but it marks a significant improvement from 2008, when homes lost a total of $3.6 trillion in values." Zillow says residential real estate values actually rose in 48 of the 154 markets it tracks.

The largest gains were in Providence, Boston and Denver. But markets including Los Angeles, Chicago and New York City were still in trouble, based on data from January through November. Zillow speculates that low mortgage rates and government assistance programs are helping real estate values.

What Zillow didn't do was post any predictions for next year. Values in 2010 could begin to drop sharply again for a number of reasons: There has been some pressure on the Fed to raise interest rates if bubbles form in the equities or commodities sectors. Increased borrowing by sovereign governments, especially the U.S., could also push rates higher as the demand for capital spikes sharply.

A number of "interest only" mortgages will reset in the next two years, and that could push up default rates as monthly payments on this type of home loan rise. Increasing unemployment could also drive up the number of people who cannot afford to stay in their homes.

So far, the government's program to modify monthly mortgage payments for people with financial difficulties has permanently extended to less than 1 million people. Defaults among homeowners in the trial portion of this federal program are high, perhaps because people with "underwater" mortgages don't have much financial incentive to own their homes in the long term.

The data on an improving residential real estate market may mask problems in the coming year.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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