Has the Housing Market Hit Bottom?

Now that a number of recent housing reports are generating some incredibly positive headlines and the global economy appears to be slowly digging its way out of an enormous hole that was created last fall when the world nearly came to an end, the burning question on the minds of millions of people is ... Has the housing market hit bottom?

There is no shortage of answers.

Unfortunately, most of them are far too simple and, in most cases, the individual or organization providing the answer has a bias of some sort.

I'm no exception.

We sold our house about five years ago and have been renting ever since.

We plan to buy again, but not until at least next year and we hope to get a lot more house for our money than we could today.

That's the soonest that I think the bottom in home prices is likely to occur around here in the price range we're looking, though a bottom in home sales may already be behind us, and this is what makes the recent discussion of a housing bottom so complicated - "hitting bottom" means different things to different people living in different parts of the country.

The discourse on this subject is full of misinformation and deception from parties with vested interests that will inevitably lead people to make horrendously bad decisions that they'll regret in another year or two while others may postpone decisions that would be best made today.

With my biases out of the way, a few thoughts on a housing market bottom are offered here. In this article, regional differences will largely be set aside and the focus will be on three sets of national housing data - new home sales, existing home sales, and existing home prices.

New Home Sales Have Bottomed

First, let's look at the home building industry, which, up until a couple years ago had accounted for about 10 to 15 percent of all home sales. Then, the homebuilders' share gradually sank to about half that amount as waves of foreclosures started hitting the market at much lower prices, cutting into their business dramatically.

Ironically, many of these foreclosure sales were homes that the builders had built and sold a couple years prior. Disgruntled home buyers who, in 2006 and 2007, complained about how builders were slashing prices on Phase III after they bought in Phase II ultimately had the last laugh in 2008 and 2009 when they walked away from their almost-brand-new home and the bank sold it at a 40 percent discount to the going prices for Phase III.

Don't feel too sorry for the homebuilders - they had a few very good years.

Anyway, things have gotten so bad in the new home construction business over the last year or so that they really can't get any worse - not only did new home sales set new all-time lows for a data series that goes back more than 40 years, they simply obliterated every other housing downturn over that period in population-adjusted terms.
The annual rate of 329,000 units seen in January of this year was not only less than the 1981 low in nominal terms, but, after accounting for the increase in population, it was not much more than half that level.

Interestingly, there couldn't have been two different eras for the homebuilders as far as the cost of money is concerned - back then they were sending truck loads of sawed up two-by-fours to the Federal Reserve building in Washington D.C. because Paul Volcker was on a mission to squash inflation with interest rates approaching 20 percent, whereas, today, the Fed has interest rates pegged at zero.

And speaking of the central bank, their legions of economists might think that housing has bottomed when looking at new home construction because this has a direct impact on economic growth - residential construction has been a drag on GDP for about four years now and, from a direct macro-economic perspective, the worst is probably behind us.

For the homebuilders, it's hard to imagine how things could get any worse than they were in January, so, unless this downturn morphs back into the Great Depression II, things have got to get better. In this case, it's probably fair to say that the bottom is already behind us.

Existing Home Sales Have Probably Bottomed

If you're in the business of selling real estate, then you've got to be thinking that you've seen the worst of the housing bubble's mean side and you may be correct in this assessment now that banks are realizing they're not going to get 2006 prices for all those foreclosed homes that have been sitting on their books for the last year or so.

There's a booming business in distressed property sales that have buoyed existing home sales for months now (much to the dismay of the homebuilders). Foreclosures and short sales accounted for some 70 percent of all home sales in Las Vegas last month and that's a good thing.

The "market" is doing what it is supposed to do - price discovery - and the fact that a lot of prices these days are being discovered through auctions is just part of that process.

And those who dismiss the lower prices fetched on distressed property sales as some sort of a temporary phenomenon should realize that they are doing so at their own peril - there's a lot more of this inventory in the pipeline as the next wave of bad loans wash up on the shores of mortgage lenders and ultimately appear on Realtor.com or Auction.com where, eventually, they'll lower their reserve prices and make a few more sales.

Though it's not as clear-cut as in the case of new home sales, existing home sales probably made a bottom back in January although the same caveats about the Great Depression II apply.
The fact that there have been a few false starts before (circled in blue above) should be some cause for concern (particularly the one in late-2008 as it relates to the possibilities of another Great Depression), but, as long as the central bank keeps pumping money into the system and as long as the government continues to guarantee the vast majority of mortgages via the wards of the state - Fannie Mae and Freddie Mac - eventually, all the excess housing inventory will be worked down and the bottom in existing home sales is probably behind us.

Before moving on to the next section on a bottom in home prices, it's important to remember that there's a big difference between home sales and home prices along with the timing of their respective bottoms.

Generally speaking, real estate agents (those who survived the last few years) are now a much happier lot than they were earlier in the year because they're making more sales. No sales means no commissions, and whether those commissions are large or something less than large makes little difference.

A real estate agent would be much more willing to help you buy or sell a house at $250,000 rather than not make that transaction at all and the fact that the home may have fetched $400,000 a couple years ago or that it may only be worth $200,000 next year doesn't really matter - they'll help you make the sale at the price you agree to and they'll try to make you feel good about it because, if they don't make the sale, they don't get paid.

A sale is a sale, but a bottom in home sales is quite different than a bottom in home prices.

Home Prices Will Not Bottom for Some Time

The vast majority of people in the world today are neither home builders or real estate sales agents, so, despite everything you hear and read about home sales - up, down, or flat - they really aren't all that relevant to most of us.

If you're like all the other prospective home buyers or sellers out there today, the only thing that you should be concerned about are home prices - whether they'll keep going down or if they've already reached a bottom.

The financial world has been buzzing over the last week as rising new home sales and rising existing home sales were followed up by yesterday's blockbuster report from the folks who run the Case-Shiller Home Price Index that - GASP! - home prices ROSE from April to May.

There it is for all to see in the colorful graphic below - the housing boom and bust in all its glory along with those little squiggles upward on the right-hand side, a sort of resurrection of the housing market by the sounds of some of the press coverage.
Yes, unfortunately, Detroit is still off the chart - a much bigger bust than boom...

More than a few anxious housewives have no doubt been elbowing their hubbies in recent days to cancel that golf game on Saturday and schedule a house-hunting expedition because the news is once again full of reports about rising home prices.

As can be seen clearly in China today, nothing excites people more than when prices rise.

While the first increase in the Case-Shiller Home Price Index in three years is a seminal event to be sure, it's probably not quite what it's being played up to be in your local real estate sales office where, remember, folks are more interested in sales than prices.

Combining the excitement people feel when prices rise with the excitement real estate agents feel when sales volume rises is a big part of the reason for the enormous rise and fall depicted above.

Just as there was virtually no experience with home prices that rose as fast as they did from 2002 to 2006 or falling as fast as home prices fell between 2007 and 2009, there is little background that anyone can draw on to predict what a "bottom" in home prices might look like, but you can just about be guaranteed that the price bottom will lag the sales bottom by at least a year as it did during the peak.

Shown below is evidence of such as the National Association of Realtors' existing home sales are plotted on the same chart as the Case Shiller 20-City Home Price Index - a 13 month lag.
Those who think that the relationship between sales and price at the bottom will somehow be different than the relationship between these two at the peak have virtually no data to back that claim.

Unfortunately, as Ben Bernanke famously said a few years ago, home prices have not declined nationally since the Great Depression.

If the bottom in sales occurred in January, why couldn't the May Case Shiller price data indicate a bottom in price?

Well, anything's possible, but this particular scenario is quite unlikely.

While there is no national data to draw on for housing price bottoms, there is one case study that provides some valuable information and it should help to put Tuesday's Case-Shiller report on rising home prices into a little better perspective - the Los Angeles housing market in the 1990s.

As shown below, housing bottoms can be long, drawn-out affairs with lots of false signals.
In the case of Los Angeles in the 1990s, it was almost two full years from the first positive reading in the price index in June 1994 until the ultimate low in February 1996. And lest anyone get too excited about that bottom in 1996, another one occurred a year later in 1997.

From what little experience there is with housing price bottoms, the odds don't favor a lasting reversal in prices in the near-term and when it comes, the rebound won't be that impressive. You'll know when home prices hit bottom when people stop talking about them.

It is important to note that in some low-priced areas where subprime loans began souring a couple years ago and foreclosure sales have been brisk for some time, the bottom in prices may be near, if not already here. Also, in parts of the country where there was never much of a boom or bust, higher prices may be seen in the near-term, but, those are about the only exceptions.

For people like you and me (at least, most of you), don't look for a bottom in prices until at least sometime next year.

Comments

[Troyhector:]

The debate over the contentious issue whether the housing market has reached its bottom and is on its way up is quite intriguing.

I think certain happenings are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.
"1) The seasonally strongest buying season
2) There’s a foreclosure moratorium about to end
3) Federal tax credits offered for 1st time homebuyers
4) Historically low mortgage rates "

Read More: www.housingnewslive.co...

Jul 30 04:45 PM

[Bigman16:]

Great article and great summary of the current housing data and how subjective these blanket terms have come to be in the mainstream media when addressing the housing industry.

However, I have yet to see a piece here that addresses the multidimensional aspects of the issues behind the housing market. Most issues require mulitdisciplinary logic and solutions and a level of collaberation amongst specialties. Its easy to argue statistics, its easy to dismantle subjective viewpoints, to say history will repeat itself and cycles come and go, but i think there is more to this mess this time around and that issue is embedded so deep into our culture, it will be hard to uncover, fix, and move onto the next cycle...the entire pendulum is swinging away from where we were and its anyone's guess as to where its swinging to -

Jul 30 05:56 PM

[Mark Bern:]

Yes the article was well written and informative. I just don't understand why so many comments that support the author's view have been rated negative.

Jul 30 06:33 PM

[Andrew Butter:]

Great article and spot on the button.

But you are wrong on one thing- changes in prices drive sales with a 13 or so month lag not the other way around, both up and down; try plotting monthly changes in prices against monthly changes in sales of existing homes.

Probable reason for that is (a) the killer line from the salesman in a rising market is "if you don't take this deal now it will be 10% more in a month....see prices rose 20% last year, here is the evidence!!" (b) in a declining market it's, "don't worry-we just hit bottom, things will turn around, better get this deal while it's hot"....that's until it becomes patently obvious that's not true.

The rest is just noise, sales won't pick up until there is a general impression that the bottom has been reached, and it will take more than some somewhat dubious up-ticks for that to happen.

Anyone who is selling now is being forced to, many of the people who are buying are "flippers", not genuine end-users. To get the real buyers back, they need to sell their homes first, many of them are just sitting tight, it's harder to get to grips with the reality of an actual loss, than to tell yourself you got a great bargain.

Jul 31 03:44 AM

[John Bowman:]

When the housing correction occurred in the early 90s, I recall many articles stating that a home is just a place to live, not an investment.

Right after that, the dotcom and tech boom came which helped to fuel optimism. In addition, the Y2k anxiety was responsible for spurring sales of a myriad of items.

Since there was no place to park money right after those events expired, real estate became the obvious choice, especially with low interest rates and irresponsible lending.

I am serioiusly doubting that these parallels will occur in the near future to restore house prices to any where near pre-bubble levels.

For a long time, homes will be just a place to live. Increasing prices will only be seen in areas of extreme shortages and/or population increases.

Jul 31 08:44 AM

[Gem Hudson:]

Hosea 8 - Verse 7
For they have sown the wind, and they shall reap the whirlwind.

Balance the deficit spending and you have to cut back. Because they can not give out freely as much as they want but paying down the debt from all that past deficit spending is to cut off. There wouldn't be any more free for the asking all on a low, low down next to nothing interest rate payment.

Jul 31 08:48 AM

[me3tv:]

Superb article and thoughtful responses, both of which provide plenty of meat to chew on as I try to bail out of the NE and get repatriated and retired to the SE. Boomers shifting to smaller homes in retirement regions while taking a hit on their last "move up" home in the "corporate regions". My plan? Suck up the loss and go. Alas - the corporate region job loss has thinned out the new "suckers". I tend to think there remains PLENTY of downward pressure on home prices for some time.

Jul 31 08:50 AM

[Accuriz:]

Tim, as always great graphs and valid points, but I would like to add:
Real Estate is three things:

Cyclical
Seasonal
Emotional

Cyclical Cycles run about 15 years in length, and the current cycle started in late 2006. We can track the beginning of this down cycle to the last down cycle in 1990-1991 and we have heard thousands of comments on this. When the cyclical adjustment occurs it is an adjustment to the underlying structural issues in the market. For this real estate cyclical the structural problem comprised of two elements:

A. Influx of new home buyers who received mortgages through non-standard financing. That is the emergence of No Asset, No Docs, Interest Only, Mortgages at 125% of Value programs. We all know the affect these had on the market.
B. Excessive over development which created 5 million vacant housing units not supported by population demand. Expectations of Baby Boomer migration and new homeowner growth fueled this development. The existing oversupply issue will take at least two, if not three more years to be absorbed and new housing starts will remain below 800,000 units in 2010 and 1 million in 2011.

Seasonal Changes occur every year and follow a fairly consistent pattern. The news today and for the next several months is a result of seasonal changes, not necessarily structural. The spring and summer selling season always show the top values in any market, and the fall and winter show the bottom. This is one of the prime affects of the recent crash, it began in late 2006 and early 2007, but did not pick up speed until late 2008. By that time the snow ball going down the hill was an avalanche and the population and financial system reacted accordingly: they ran! The actual correction or rebound in housing will not show signs until the beginning of the Spring 2010 selling season.

Emotional changes are best described by many of the commentaries. Because we lack so much important data on the real estate markets, such as the sales price per square foot which the rest of the industrialized world uses and because of our own ignorance or arrogance (we all know the answer) our emotions take control. Fear of the unknown is the worst element of any financial market. That is what we experienced for the past nine months.

What creates fear is the lack of information. In real estate we always are reporting on the past, and trying to guess the future. Utilization of more quantitative data will permit us to evaluate data more accurately and track the markets in an efficient manner.

How many of the commentators and authors have the actual data? How many are relying on other data sources to build their articles? I have the actual sales and inventory data from over 1,000 assessment offices covering the top 100 MSA’s; but I must rely on Census, Commerce, Labor for their data and we all know there are issues with the data.

So I finish with this, the Free Market must develop an independent solution to track and predict the real estate market, or we will all be talking about this again in 15 years.

Jul 31 08:55 AM

[TCK:]

Here in Las Vegas, prices are down 70% even in some nice neighborhoods. Two years ago my similar house sold for over $300,000 now can be bought in low 100's.

At some point evrything is for sale at the right price.

Jul 31 09:04 AM

[MBAmichael:]

As a home seller currently, I don't see a bottom in home values. As the behavior of the article's author suggests, many are trying to time the market to sell "high" and then buy at the bottom. Everyone wants to take advantage of the buying opportunity to move up. Unfortunately, the one uncertainty is what our dear politicians will do to interfere with the market. I'm betting that we will see some of the same old regulatory interference that created the bubble and we will see a brief phony recovery. As inflation and high interest rates increase, we'll see even more government assistance to pump up sales. We're witnessing the bubble of all bubbles in the form of the federal government's propping up of auto, home, energy, agriculture, healthcare etc.

Jul 31 09:14 AM

[User 464129:]

Thank you for your outstanding reporting. I differ, however, with regard to one of your closing statements, "It is important to note that in some low-priced areas where subprime loans began souring a couple years ago and foreclosure sales have been brisk for some time, the bottom in prices may be near, if not already here." This phenomenon does not apply only to "low-priced areas," as we have been following the foreclosure statistics since November of 2008 and reporting on same. Much of Orange County, CA (one of the highest per capita home value areas) has felt the sting and has become the hotbed of foreclosure fraud as a result. IMPORTANT: Looking forward, let's keep our eye on the fact that with the sharp increase in foreclosures comes the sharp increase in consumers flowing into the residential rental market. One might think that is fantastic news for REITs and large landlords, like UDR (NYSE:UDR). However, just as consumers are making the transition, so are the opportunists looking to capitalize on the misfortune of consumers. The fraud that it is prevalent in the foreclosure rescue trend is now more than ever equally (if not more so) in the rental market. See the following 2 articles to prove this point:
www.pr-inside.com/udr-...
www.pr-inside.com/nyse...

Erin Baldwin
Consumer Advocate
Bad Biz Finder

Jul 31 10:45 AM

[drmike1000:]

Really nice well presented article by Mr. Iacono. Excellent further insight has been also provided by many of the readers' comments.

In New Jersey in an effort to partially stem the state's tax revenue decline, the legislature has passed a law in which homeowner's property taxes will no longer be a deductable item when calculating one's state income tax obligation. Legislation like this if passed by other states could hinder future home purchases whether they be
purchases of new homes or existing homes.

Jul 31 10:57 AM

[tedstr:]

This is all you need to read.
en.wikipedia.org/wiki/...

Cheap money fueled by Fannie and Freddie and a politcal agenda to have a poor minorities own homes paid off well over the past 10 years and achieved its purpose...albeit now with a price due.

A natural spinoff of this was an added bubble at all price points.

The only unknown is what happens to an illiquid asset when, looks to me like about 10-15% of the demand, is taken away. I don't know but it would seem pretty certain that at least a 10-15% price decline is in the cards. We're already there, so my guess is that its more like 2-3x that amount so 30-50% nationwide average decline seems a achievable.

But without the government programs to fuel this (and without the wall street CDO enablers) there is no way that we are going to see any kind of return of this demand, which means we have to create it by population expansion and a tiny annual % increase in % population homeownership which is more the historical norm.

With baby boomers downsizing and population growth projections only running about 1% a year this could take some time.

This assumes rates don't go to Pluto with inflation next year when the world get's a little less eager to buy our debt.

Remember the banks were give a reprieve by the govmnt on Mark to Market in May when they were allowed to keep more non performing loans in Tier1. This has no doubt slowed the write offs and foreclosures. By all my local accocunts, short sales are still very diffecult. No one wants to take a haircut. Why would you when you can still carry the loan. But this too shall change

Jul 31 11:00 AM

[mineralt:]

As a headhunter, I can give you only my anecdotal view. We have had zero wage growth in this country since the late 90's. The only reason housing went up so much is that rates went so low. Without the exotic ARMs, and no wage inflation, housing will be no better than flat for the next 20 years. With China and India doing a lot of our citizen's work for $5/hr, I see no increase in middle class housing prices.

Jul 31 12:36 PM

[TBill:]

Having now read all this, and having sold my house, I take away a strategy: buy a low end house below the cost of construction. This seems to be where prices have firmed and likely bottomed. Probably easiest to do where the damage is greatest, Las Vegas and Phoenix. We're talking less than $50/sq ft. Make lots of bids, you'll pick up something eventually. Live in it, watch the high end house prices crumble. When you think the timing is right, trade up. Winner?

Jul 31 01:29 PM

[jimmy Turano:]

HOUSING HIT BOTTOM? In New York, maybe
sales are picking up in Queens, but many deals are blown up 30-120 days after contract because of the lending institutions not issuing a committment.
25% down you would think is fairly good, but the additional paperwork thereafter is time consuming.
Now some homeowners are in contract 120 days or longer? But no approvals issued yet?
The question should be have Banks hit bottom and starting to issue loans at a normal pace once again. Like 45-60 days.

Jul 31 01:47 PM

[Chickenpookie:]

As rents fall and property taxes increase, property owners will feel a squeeze and may be forced to unload, releasing additional inventory into the market.

I don't think we've seen a bottom for prices quite yet. I'm shopping but I'm not buying until I find exactly what I want, I can be patient in the selection process this time.

I blame Congress(for looking the other way and selling us NAFTA), Bernanke (for raising rates before converting ARMS to fixed), and Greenspan (for keeping rates too low for too long).

Jul 31 06:26 PM

[MSimon:]

Three Words:

COMMERCIAL REAL ESTATE

Aug 01 10:59 AM

[Supersuperman:]

nah I don't think it's bottom yet on the price. the next wave of housing crash for $1Million + housing is coming:

www.wealthalchemist.co.../

Aug 01 12:02 PM

[jimmy Turano:]

continued, Aug.24th, Mortgage rates are around 6% now. If we want to accommodate homeowners to modify their mortages, and stop foreclosures, lowering the mortgage rates to 4.5% would help and curtail foreclosures while creating a turnaround in home sales with such attractive financing mortgage terms, and create a boom once again in home sales, which in turn will help appliance companies, paint companies, furniture companies and so on.
No cash for clinkers are more important.
Now cash for refrigerator clinkers are next.
lastly, everyone who lost their jobs and homes will be issued a bailout tent for them and their family to live in. Sounds rediculous but so is our new President, congress and all the other crooks.

Aug 24 06:19 PM