Searching for a Housing Bottom? Look at New Sales Activity

Looking for a Housing Bottom? Watch New Home Sales Activity

The widely followed S&P Case-Shiller Home Price Indices continue their free fall with no bottom in sight (Figure 1).

click to enlarge

Figure 1: Case-Shiller continues to decline at a record pace.

Because it is illiquid, real estate is truly a long-term investment. Yet few have taken the time to look at this asset from a long-term perspective. The Winans International Real Estate Index (WIREI) measures US new home prices from 1830, probably the longest data series available. That history shows that real estate has not beaten the long-term average return available from stocks over time (Figure 2).

Figure 2: Real estate has been as volatile as stocks when viewed from a long-term perspective.

History also tells us that the current market looks bad, but it is far from the worst. Figure 3 offers insight into the extent and duration of pervious declines in new home prices. The Depression era drop of 68% from 1929 to 1932 makes the current 23% decline seem tame.

Figure 3: We are experiencing only the sixth worst bear market in housing.

Ken Winans, author of “Investment Atlas,” a book offering deep historical perspective of the markets, offers guidance on when to anticipate a bottom.

He says:

This bear market will probably not end in 2009. Past real estate bear markets ended when the average time it took to sell a new house dropped to 3 1/2 months. Currently, it is taking over 9 months for transactions to close due to tight credit conditions.

Watching this figure might help prudent investors spot the upturn on a national and local level.

Comments

[prairiedog555:]

The mortgage market is a huge factor in the supply/demand of housing. If we see 4% mortgage rates I believe that is when the bottom will be achieved. Also I don't think that mortgage rates and money supply was as aggressively manipulated in past housing recessions.
The mega houses and markets will suffer, average middle class affordable homes will soon stabilize.

Feb 05 08:16 AM

[Still Renting:]

Prariedog, interesting comment at the end. I live in Seattle and decided back in 2005 that it would not be prudent to buy in this market. I still think it isn't.

Yet I just bought 13 acres in central Kentucky. The 30 year house payments will be roughly the same as my monthly payments on my six year loan on my old Chrysler.

The price was so low that the property could continue to lose 75% of it's value and it would still be worth it to me. It is because I didn't buy it as an investment. I bought it because it is exactly where I want to live and I can afford it.

And as you pointed out. Central Kentucky aint San Diego or Seattle. It just didn't run-up and will almost certainly not have all that much of a run-down.

Simple, really.

Feb 05 11:30 AM