Housing: Barron's Calls a Bottom

Includes: IYR, XHB
by: SA Eli Hoffmann

Barron's magazine's cover story boldly calls a bottom to the ravaged housing market

Chip Case (of S&P/Case-Shiller fame), whose knowledge of the housing market goes back decades and is based on the voluminous collection of data, is among those who think home prices may be nearing a bottom. Case notes, among other things, that new housing starts fell to 975,000 in April from a peak rate of 2.27 million in January 2006, and that three declines of similar magnitude -- from more than two million to less than one million -- have occurred in the past 35 years. "Every time this has happened before, housing-market activity has rebounded within a quarter and caught experts by surprise." 

Author Jonathan Laing does a convincing job gathering data to support his argument that a housing bottom is either in, or in the process of forming. A sampling:

  • Total inventories of unsold existing homes is down to 10.8 months from 11.2 months in April.
  • Despite last month's biggest ever 15.3% home price drop, eight of the 20 markets covered saw price increases - up from just two a month prior.
  • Home price indexes are skewed by steep drops in the value of subprime properties - which account for only 10% of the all U.S. housing.
  • A $300B congressional effort to allow FHA support of troubled mortgages, and/or a government takeover of Fannie (FNM) and Freddie (FRE), would ease lack-of-credit concerns.
  • Home sales of 5M/year are the same as a decade ago - yet the population has grown by 25M and the job market by 10M since then.
  • The much-feared hump in adjustable-rate-mortgage resets has been blunted by early mortgage defaults.
  • Early- and late-stage delinquencies on subprime properties have been falling for the past 6-8 months. 

In hindsight, the housing bust hasn't been nearly as calamitous as depicted in the media, or as Wall Street's woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.


It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over. 


Tim Plaehn also notes spots of recovery in certain housing markets. "It appears it is not 'different this time' for the U.S. real estate market... I see the market working off excess inventory and a leveling of home prices."

Judy Weil last week collected data points from across the U.S. that demonstrate falling home prices - and sales declines.