Has Housing Finally Hit Bottom?

Includes: ITB, PKB, XHB
by: Shaun Connell

I've been keeping an eye on real estate on a daily basis for the last couple of years, because this is likely a once in a lifetime opportunity for me to see interest rates and housing prices both fall so far for so long. Of course, falling housing prices aren't necessarily an opportunity if they're falling out of bubble territory, but markets generally have a habit of completely overreacting with screams of "this time it's different".

Still, as of right now, almost all signs are pointing toward housing hitting a bottom finally. Home sales are up 10% compared to this time a year ago, the supply of homes is about half of what it was at its worst, inventory is at a seven-year low while home construction is up 25% compared to last year, etc.

Fewer homes are vacant right now than since 2006. This is a great sign of a recovery, especially considering the above. This is why the Wall-Street Journal announced just two days ago that the "bust" was over.

Incomes Must Rise?

In essentially every article I've written about real estate, several people point out that housing can't recover because incomes haven't recovered.

This fundamentally misses the point of how the housing market works, and seems to view housing strictly as something that must be consumed. It's also even an oversimplification of how important incomes are.

Here are several reasons housing can recover without an income recovery:

Investors. People who have been sitting on money have to put it somewhere. And plenty are looking at putting it into real estate, especially single-family homes. I liquidated a lot of my portfolio a few months ago, and I've been obsessed with local housing because I plan on buying my first house at some point in the next 12 months. I don't plan on living in this area for too long, but having a rental property is a great investment and I plan on adding them to my portfolio as regularly as I can.

Overreaction. Just because incomes are increasing doesn't mean demand for housing will go up. Especially not if housing prices overreacted. Incomes and housing demand aren't perfectly correlated.

By the logic of "housing can't recover without new income", housing should have just fallen at the rate income fell. This obviously didn't happen because it's absurdly oversimplified.

Don't get me wrong -- if income keeps falling, that'll be a huge pressure in housing markets, but the two aren't linked together, and we'll likely see housing bottom and start increasing again far before we see real incomes recover.

Debt. The easier it becomes to lend, the more likely we'll see a housing recovery. And as interest rates keep falling lower, that's spurring on housing purchases because even poorer people can suddenly afford to buy some houses. Not all poor people and not all houses, of course, but some of them.

Debt isn't the only thing necessary to purchase new homes, of course. Plenty of people, including myself, are using cash to purchase homes because in some areas of the country, housing is so shot that affordability is remarkable, as USA Today writes.

Don't confuse the housing market with the economy. The two are obviously connected but aren't the same thing. The economy is worse now than just two years ago, but the housing market absolutely isn't, as I wrote last month saying that the recovery was likely under way.

Don't get me wrong -- if the economy dramatically lurches again, this could make housing prices fall even more. But in 30 years, people who didn't take advantage of the insanely low interest rates and relatively cheap prices will be absolutely kicking themselves and regretting not making a housing move right soon.

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