The Real Estate Market Just Hit Rock Bottom

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 |  Includes: XHB
by: Lou Basenese

I can guarantee it – if there’s one thing Americans want more than a balanced budget or a strong economy, it’s an end to the bloodbath in the residential real estate market. Since the peak, the average home is worth 20% less, based on the FHFA Housing Price Index. Of course, that’s just the average. Price drops have been far worse for homeowners in Nevada (-60%), Arizona (-52%), Florida (-50%), Michigan (-44%) and California (-44%). (Ouch!)

And if that’s not depressing enough news, we get this last week: The S&P/Case-Shiller 20-city composite home price index revealed that real estate prices were down another 3.67% through November 2011. (Double ouch!)

In response to the continued declines, S&P’s David Blitzer said, “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.”

Hogwash!

I’m here to tell you we’ve hit a bottom in the real estate market. Am I delusional? Hardly.

Now let me prove it to you…

It’s Not All About Price

The truth is, prices are going to be the last thing to bottom out. They’re a lagging indicator for the overall real estate market.

Remember, we’re dealing with a massive oversupply situation. So before we can expect prices to start climbing, we need the market to find a new equilibrium. Supply needs to move back in line with demand. And, according to the latest housing starts and new home sales data, that appears to be happening.

As you can see in this chart, housing starts grinded to a halt in mid-2009. Ever since then, though, they’ve moved sideways.

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Conclusion: The market found a new equilibrium right around 600,000 units. (An estimated 606,900 housing units were started in 2011, up 3.4% from 2010, according to the Census Bureau.)

Moving on to new home sales, they fell 2.2% in December to hit the lowest level on record. But as you can see, we’ve been clearly plodding along a bottom since the middle of last year.

Click to enlarge

Conclusion: The equilibrium for new home sales is right around 300,000 units.

Of course, these are all historical numbers. And as my friend and colleague, Karim Rahemtulla, told you on Monday, “We need indicators that tell us where the market is heading, not where it’s been.”

Or, more simply, we need boots-on-the-ground information. So let me share with you what I’ve uncovered in my recent travels…

Florida: First-In, First-Out

For months now, I’ve been carefully monitoring the new home sales activity in my home state of Florida. And the market is clearly turning. Developments that were cleared, platted, plumbed, but then abandoned for years have now been reacquired. And rooftops are going up.

Elsewhere, in developments that were nearly finished before the downturn, new builders are coming in to complete the job. What’s more, my discussions with the sales people in many of the developments confirm my observations. They’re moving product.

Remember, Florida was one of the hardest-hit real estate markets. So it’s likely to be one of the first to recover. And based on my channel checks, that’s exactly what’s happening.

The latest price action in the SPDR S&P Homebuilders ETF (NYSE: XHB) only adds to my conviction. It’s up 17.9% year-to-date and almost 25% over the last three months. If you share my belief that the market is a forward-looking beast, this is yet another sign that the housing market is on the mend.

So when can we finally expect prices to start rebounding? Sadly, my crystal ball is in the shop so I can’t give you an exact date. But I can tell you this – right now, new homebuilders are in negotiating mode.

One sales representative I spoke with told me we could put together an “offer” to present to the builder. I shook my head in disbelief. Back in the go-go days, no builder was willing to negotiate. They simply set and raised prices at their leisure.

Bottom line: Based on new home sales and housing starts data, the bottom has arrived for the real estate market.

Once builders stop negotiating and instead, simply say, “This is the price, take it or leave it,” then we’ll know a bottom in prices has hit, too. I’ll keep conducting my channel checks and will let you know once I get that confirmation.