Using phrases like “The New Normal,” and “Modest Recovery,” the state’s top authority on housing was mildly upbeat about 2010’s market prospects in its annual year-ahead forecast issued today.

The California Association of Realtors’ 2010 California Housing Market Forecast indicates that the median price of a home in California will rise 3.3% to $280,000 in 2010. However, sales for 2010 will drop 2.3% to 527,500 units, compared with 540,000 units projected in 2009, the report projects.

In their report CAR experts say 2010 will mark the beginning of the “new normal” for California’s housing market, and by that they mean the condition of the housing market will be driven by a “steady stream of distressed sales” on the low end of the housing spectrum, as well as moderate price appreciation.

“With distressed properties accounting for nearly one-third of the sales in 2010, inventory will be relatively lean, under six months during the off-season months, and a roughly four-month supply during the peak season,” CAR’s top economist, Leslie Appleton-Young said in a statement. “We expect the median price to decrease slightly through the remainder of 2009 and into next year, then rise before leveling off next summer. For the year as a whole, home prices are forecast to reach $280,000.”

“The wild cards for 2010 include foreclosures, loan resets, the labor market, and the California budget crisis, as well as the actions of the federal government,” Appleton-Young also noted.

Not everyone is so optimistic, and some believe that some of those “wild cards” are likely to deal the state’s housing market some setbacks. “I think that until the market… is allowed to function on its own, nobody knows what direction it’s going to go,” says Jeremy Colonna, with Belmont Shore-based Colonna & Co. Realty. “Right now the powers that be are experimenting with it. They’re trying to encourage short sales by encouraging large lenders to create streamlined short sale programs so homeowners can avoid the foreclosure situation.”

Besides artificially boosting the market by keeping foreclosures temporarily at bay, the efforts by the government are also giving a false sense that the market is turning better than it is, Colonna says. “I have a hard time believing that the market’s going to be going plus, especially considering that right now all of those loans that were five-year fixed (rates) that were done in ‘05, ‘06 and ‘07 are going to be turning into adjustable rate mortgages.”

Once those loans turn after the five-year mark, homeowners can no longer pay minimum payments. “They will go to a 25-year fully amortized loan at whatever the index is,” Colonna adds.

Take for example a $500,000 loan with a start-up interest rate of 3% that yields monthly payments of $2,100 a month. When five years are up, the rates would go to about 5% based on how mortgages are shaping up presently, Colonna notes. “Their payment goes to nearly $3,100 a month, and that’s only with a 2% increase in the rate,” he adds. “And that’s not my doom and gloom scenario.”

CAR’s 2010 California Housing Market Forecast will be officially presented during California Realtor Expo 2009 running from Tuesday to Thursday at the San Jose Convention Center in San Jose.

Incoming CAR president Steve Goggard believes just the opposite of Colonna, that most of the foreclosures and short sales that dragged down the market have already occurred. “A lot of that short sale and foreclosure stuff is behind us,” he says.

Goddard acknowledges there are more foreclosures and short sales yet to come in 2010, but those properties are starting to get multiple offers and selling prices are being bid higher. Another factor that Goddard believes will drive up housing prices is a dwindling inventory – particularly in southern California and Long Beach.

“We’re running short of inventory here,” he said. According to CAR, last month inventory in California was at 4.1 months. That’s compared with a historic average of between 7 and 7.5 months.

“I’d say this is all pretty good news,” Goddard says. “Housing may have hit bottom or may be at bottom, but if you’re going to buy, now’s the time.”