Is The Housing Slump Over?

Yeah! Housing will recover in Q1!

Or so says the NAR:

According to the National Association of Realtors "the worst of the U.S. housing slump is over."

Sales of previously owned U.S. homes will grow at an annual rate of 6.29 million in the first quarter, snapping five consecutive quarterly declines, the industry's largest trade group said today. New-home sales, about 15 percent of the market, won't recover until 2007's fourth quarter when transactions will grow to an annualized rate of 967,000 after bottoming at 944,000 in the third quarter, Chicago-based NAR said.

No word on whether the $40 million advertising campaign [It's a great time to buy or sell a home!] is having any impact on this so-called recovery.

David Lereah, NAR’s chief economist:

“Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards.”

Lereah did not offer any evidence for his statement.

Call it wishful thinking: In 2006, the inventory in new and existing residential homes for sale was at record high levels [inventory still remains dangerously high]. And home prices have dropped far more than the reported by government or NAR statistics. That combination -- excess inventory and falling prices -- does not bespeak a bottom in the housing sector.

The NAR has not shown itself to be a particularly astute forecaster: They projected 2006 housing resales would be 6.84 million; in actuality, sales fell to 6.47 million units sold.

Calling the bottom in real estate has been a losing gambit this year. In addition to the NAR's chief economist, several other cheerleaders have erroneously called for the same, including former Fed Chief Alan Greenspan. They have so far been proven wrong.

Historically, housing may still have further to go. According to Hugh Moore of Guerite Advisors:

"In the previous seven cycles since 1959, housing starts [seasonally adjusted] have fallen, on average, 50.7% from peak-to-trough. Each time housing starts have fallen more than 25% from their most recent peak, a recession has followed [except during the 'credit crunch' of 1966-67 that ended in an economic contraction, but not an 'official' recession]... Look at the chart below. Housing starts have dropped 34% so far since their peak in January of 2006. Just to get to the average drop we have another 20% or so drop in starts to go.

Real housing bottoms require more than wishful thinking; they require solid evidence, and more than mere price reductions. A significant decrease in inventory, plus motivated sellers, would go a long way to seeing a bottom form. So far, we have yet to see any evidence of that.