Home Prices Decline But Future Looking Bright

 |  Includes: XHB
by: Calafia Beach Pundit

According to both Case Shiller and Radar Logic, U.S. housing prices were still declining late last year and early this year (both series report prices with a considerable lag). Nominal prices have fallen by one-third, while real prices have fallen by 41% since their mid-2006 highs. Ouch.

This all sounds pretty grim, but not when contrasted with news today that bidding wars are breaking out in Seattle, Silicon Vally, Miami and Washington. To sum up the current state of the housing market, we are in the midst of an important inflection point in which prices are no longer uniformly declining but in some areas prices are now rising. Focusing on where housing prices were several months ago is missing the larger picture, which is that we have seen the worst of the housing debacle and the future is looking brighter. Obsessing over the historically miserable 700K pace of housing starts is to miss the more important fact that starts are up 35% in the past year.

The stock market figured this out long ago. Homebuilders' stocks are up 160% from their recession lows, and REITS have returned 240% since the market bottomed in early March 2009, about double the 123% total return on the S&P 500.

In short, housing prices are a terribly misleading picture of the dynamic that has been playing out in the market for the past several years. Prices are way down, to be sure, but that is the way the market deals with an excess inventory of housing. Housing prices are now incredibly affordable, and the excess inventory has been completely worked off in at least several markets around the country. It won't be long before bidding wars start erupting in nearly every market, and when the news of rising home prices finally makes the headlines, there could be a buying stampede.