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Housing Bottom is Behind Us

|Includes: AVB, TOL, SPDR Homebuilders ETF (XHB)

A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.

“Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.

Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”

In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:

This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.

Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.

Why?

First, the Case-Shiller index is up five months in a row–a sign of substantial strength.

Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.

Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:

Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)

Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)

Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.

Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.

But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.

And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar.  At least one major lender has dramatically reduced the number of  foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.

Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.

Disclosure: Long AVB