A recent report from Goldman Sachs has many people talking and asking questions about where home prices are headed as we head into the latter half of 2010 and look forward toward the next few years.

Looking at several markets, the report suggests that the metro areas of Las Vegas and Portland will show declines (-12 and -4 percent in 12 months and -6 and -12 percent in a 24-month period) while most of California will show very modest gains (San Diego increasing by 5 percent in 24-month and San Francisco increasing by 3 percent in the same time period).

Perhaps the most dramatic prediction suggested that Seattle real estate values were set to move lower by eight percent in the next year and 22 percent in two years.

These figures are quite extraordinary so I set out to review their methodology and discuss my feelings as to their analysis. These are my cursory thoughts:

1. The geographic area that Goldman Sachs uses for their analysis is the same as the Case Shiller (CS) Index (a foundation for the historic information that they parsed). My issue here is that the CS Index geography for the Seattle metro area includes King, Pierce as well as Snohomish counties. It is clear to all that follow real estate values locally that we are suffering far more in the counties to the north and south of Seattle, and that to use this geography will likely skew results.
2. They also consider mortgage delinquencies in their model. It is true that foreclosures are up in our market but not to a level that gives this credence. In fact we are well below all of our west coast neighbors if I look at foreclosures per household.
3. They add mortgage rates into their model and it is my belief that, although we will see rates increase in the second half of this year, I do not anticipate a move much above 6.5 percent until well into 2011 if not later.

However, I am also not sure that I concur with the philosophy that excessive price declines back in 2008 and 2009 (far more in other markets than were seen in Seattle) will allow for greater stability going forward. If we are in an environment where we are creating jobs and economic growth here, why will we fair so substantially worse than our neighbors everything else being equal?

The analysis is interesting and forecasting is an inherently complex and difficult task, especially when you are looking at real estate where emotion is as strong an influence as logic. Only time will tell who is correct.

This post was written by Matthew Gardner.