Housing Market Exhibits Early Signs Of Bottoming Behavior

by: Erik McCurdy

During the summer of 2006, our analysis indicated that the top of the housing market was likely in place and we predicted several years of financial market turmoil as the most speculative real estate bubble in US history imploded. The initial phase of the secular decline in housing prices has proceeded exactly as expected since then and it has now been more than five years since the market turned down.

Although this last bubble was unprecedented with respect to the speculative excesses that were introduced into the system, the ten-year housing cycle has been very reliable historically, so we have been expecting the next bottom to form in 2011 or early 2012.

Although real housing values are still trending lower, we are seeing bottoming behavior in the data trends that usually precede the development of a low in prices. The following graph from Calculated Risk displays the long-term views of single-family home starts, new home sales and residential investment.

Notice that all three trends have been consolidating at current levels for more than one year following the violent declines from 2007 to 2009. This behavior suggests that price is preparing to bottom as well, although it is important to note that the developing cyclical low will almost certainly be very different in character from all of the previous "normal" lows displayed on the graph above. Again, the last housing bubble was the largest, by far, in US history as shown on the following graph of real home prices from HousingStory.net.

Home values will not rebound in typical fashion during the forthcoming cyclical uptrend. Instead, they will likely move sideways as the market continues to integrate the massive oversupply introduced during the speculative frenzy of the bubble years. The healing process is underway, but it will take many years to repair the damage that was inflicted last decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.