Case/Shiller Index: Are We Close to a Bottom?

by: Ron Haruni

Karl E. Case, one of the economists that developed the 20 MSA methodology, a widely used subset by Standard & Poor’s in the S&P/Case Shiller Home Price Index, thinks that the housing market may be near a bottom.

According to WSJ, in a paper presented this week before the Brookings Institution in Washington, Mr. Case argued that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps. He also noted that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months.

Obviously, anyone making specific predictions on the Housing sector should be regarded with some doze of skepticism. After all, the housing collapse led to rapidly falling home prices and massive defaults on mortgages, causing major dislocations in financial markets - the ongoing negative effects of which, in terms of write-downs, credit contraction and dilutive capital raises, continue to weigh heavily on both Financials and the housing market. However, considering Mr. Case’s authority in the field, his model of predictions, and expertise on real estate markets and prices, we can argue that while the economics has never been a controlled science, perhaps, there is some cause for optimism here.

At the same time, the Case-Shiller index’s most recent reading was 19% below its July 2006 peak, and many analysts, including Robert Shiller, the co-creator of the Case/Shiller index, say the decline is far from over since inventory of unsold homes on the market is still very high. The main basis for Shiller’s argument is that until that excess is absorbed, home prices will continue to be negatively affected. This has further fueled the debate of whether the deterioration in the Housing sector will continue, or if we are seeing the beginning of the end of the crisis. In addition, if so, if there is some sort of consolidation taking place at current levels.

Irrespective of these suppositions and as the debate continues, it would be naive and unreasonable to pretend that the housing sector, which has undergone the biggest speculative boom in U.S. history, will start immediately uptrending or come back with a bang. Instead, a slow languishing bottoming action is the most likely scenario.