The final numbers are in and it's official: 2010 was the worst year for home sales since the local Realtors association began tracking home sales in the metro area nearly a decade ago.

Though median sale prices rose modestly last year -- 2.3 percent -- the number of homes sold slipped to 37,365, down 17 percent from 2009, and even lower than 2008, which many in the industry had hoped was the bottom of the market, according to data released Thursday by the Minneapolis Area Association of Realtors.

The grim report comes at a time of tempered optimism about the coming year for both the housing market and the broader economy, which are expected to show continuing signs of recovery.

Rob Grunewald, associate economist for the Federal Reserve Bank of Minneapolis, said that while the construction industry saw more promising numbers during the last weeks of the year, a full thaw for the housing market isn't likely during 2011. "While the overall Minnesota economy is expected to recover moderately in 2011," he said. "The housing industry faces conditions that will likely keep home prices and building at relatively low levels."

Expectations for 2010 were low from the start, but the year started with a bang as home sales rose on the heels of an $8,000 federal home buyer's tax credit, which helped keep prices buoyant. When the credit expired at the end of April though, the market came to a screeching halt, causing sales to fall dramatically during the last half of the year.

"It was like two different markets," said Pat Paulson, president of the Minneapolis Area Association of Realtors. He said that during the last week of April there were 1,460 pending sales, the highest weekly level since 2005. Since then sales have fallen to about 600 deals a week with the exception of the last couple weeks of the year.

"The last half of the year is fresh in my mind, and I'd say it was disappointing," he said. "We knew there'd be a drop-off, but we didn't expect it to be such a steep drop. But the good thing is that prices didn't free fall."

Indeed, prices didn't plummet. The median sale price of all closed sales last year was up slightly to about $170,000, but that's only because of an increase in sales of traditional listings and upper-bracket houses. Prices of so-called lender-mediated properties -- including foreclosures and short sales -- fell dramatically last year and those houses tended to sell for far less than traditional houses.

For 2011 the association predicts that sale prices will rise a few thousand dollars, to $175,000, but that depends entirely on interest rates and how quickly foreclosures are processed, the group said. That process now takes about year.

Though interest rates have risen slightly in recent months -- still hovering near 5 percent -- the decline in sale prices has caused housing affordability to rise to near-record levels. That's why sales agents are optimistic that the market will improve slightly, or at least stabilize.

"People are recognizing that it's an opportunity and they're concluding that it's not going to last forever," said, Matt Baker, branch vice president for the Lakes office at Coldwell Banker Burnet.

The market started to pick up during the final weeks of the year. Baker said that the 275 agents in his office sold more upper-bracket houses than they did in 2009.

Another positive sign

There's another positive sign going into the new year: inventory levels. Though there's a 7.1-month supply of houses on the market right now -- a 42 percent increase from last year -- the supply of houses on the market is 6.6 percent lower than it was two years ago. The measure represents how long the existing supply of houses will last at the current sales pace.

Still, huge headwinds remain. Mortgages are difficult to come by and prospective buyers are worried about falling prices and job security. Unemployment in the state, while better than the nation, is still high.

And the foreclosure crisis, one of the primary reasons for depressed prices, does not appear to be over yet. On Thursday RealtyTrac said that in Minnesota the number of default notices sent during the fourth quarter of 2010 declined from a year ago, but that during the year filings were only about 1 percent below 2009 and 54 percent ahead of 2008. Nationwide a record number of filings were made during the year.

Paulson said that it's going to be difficult to predict just how long those foreclosures will remain in the pipeline, but he expects them to be at historically high levels for at least the next two to three years. At the height of the market in 2005 and 2006 there were about 70 to 100 sheriff's sales every month in Hennepin County, but during the last half of 2010 there were 500 per month. He expects that same or worse in 2011.

Herb Tousley, a real estate expert at the University of St. Thomas, said that burning through those foreclosures -- and adding jobs -- will be key to a housing recovery. And while he and others expect that process to take at least a couple years, he says that better-than-average unemployment rates in the Twin Cities could cause home prices to rise 2 to 4 percent. Unlike most economic recoveries in which employment follows a recovery in housing, he said this one is going to happen in reverse.

"I think it's going to be a year to be cautiously optimistic," Tousley said.

Jim Buchta • 612-673-7376