The mild weakening of O'ahu home prices that has emerged this year should continue for at least two more years, according to a new local economic forecast that predicts an 11 percent median price drop over three years.

A lot of factors, including where interests rates may move and the future health of the local and national economies, lend uncertainty to where O'ahu home prices will move.

But if the projection by the University of Hawai'i Economic Research Organization is on the mark, the median price of previously owned single-family homes on O'ahu in 2010 would be about $570,000 — $70,000 below last year's presumed peak of about $640,000 and $20,000 below the median price in 2005.

In the forecast update published today, UHERO predicts a 3.6 percent decline in the median home price this year, followed by a 5.2 percent decline next year and a 2.6 percent decline in 2010.

UHERO said such a change would still be a relatively modest decline compared with Mainland housing markets, but is worse than the organization was forecasting in a March report. In March, UHERO forecast a 3.2 percent decrease in home prices this year, followed by a 2.3 percent drop next year.

This year through August, the median price is down 2.8 percent to $629,000, according to the Honolulu Board of Realtors, which tracks sales differently than UHERO to arrive at slightly different median price figures.

UHERO said the degraded view of home prices is driven by continued turmoil in credit markets, weak housing demand and growing unemployment.

Carl Bonham, a UH economics professor and UHERO executive director who co-authored the report with Bank of Hawaii chief economist Paul Brewbaker, said the outlook for job growth is a prime concern. "That's really the big factor," he said. "It affects consumer confidence, which plays a role in any large purchase like a house or a car."

Harvey Shapiro, research economist for the Honolulu Board of Realtors, said forecasts are only a guess, and that his guess is that the median O'ahu home price next year will more or less move sideways.

"So much depends on so much else," he said, adding that 2010 in his view is too far off to be predicting home prices. "The market is still contracting. Sales-wise, I think we're getting near the bottom, but it's really hard to tell."

In the O'ahu condominium resale market, UHERO forecasts that the median price will be up 1 percent this year to about $328,000, then decline 4.9 percent next year and 5.9 percent in 2010.

This year through August, the median condo sale price is up 1.5 percent to $330,000, according to the Honolulu Board of Realtors.

UHERO included its home price forecasts in a broader report on Hawai'i's construction industry, which is being dragged down in large part because home construction has been responding to a decline in sales that began in 2005.

UHERO expects inflation-adjusted construction spending (in 2007 dollars) will decline 3.8 percent this year to $7.56 billion from $7.86 billion last year.

The decline in industry spending is forecast to continue with a 4.7 percent drop to $7.21 billion next year, followed by a 5.5 percent drop to $6.81 billion in 2010.

Like single-family home prices, construction spending is on pace to contract for the first year since the industry boom began to build nearly a decade ago.

UHERO said that at the peak of construction permitting in 2005, new residential building permits comprised nearly 65 percent of all private construction authorized statewide, most of it on the Neighbor Islands, where vacation homes were being snapped up by Mainland baby boomers and other investors.

Private residential construction is forecast by UHERO to stabilize and begin a gradual recovery in 2010, but only after an expected 20 percent decline in permits this year and a 6 percent dip next year.

Commercial and government construction, including military housing projects, are helping moderate the downturn, which UHERO said is considerably more moderate than in many Mainland markets.

Largely because military housing construction and renovation projects are peaking this year under public-private partnerships, UHERO expects construction jobs to rise slightly this year to about 39,180 from 39,000 last year, before declining to about 38,000 next year and about 37,000 in 2010.

"The current business cycle slowdown, increased land and construction costs (mostly due to a surge in commodity prices), together with tighter credit conditions, present challenges for new construction in the islands," the report said.

Still, because construction costs are expected to continue rising at 4 percent to 5 percent a year, UHERO projects that nominal construction industry spending (spending that includes inflation) will tick up 1 percent this year to about $7.9 billion and hold steady next year before slipping 1.4 percent to $7.8 billion in 2010.