An End in Sight?

From Bankers and Tradesmen

End To U.S. Housing Market Meltdown In Sight?

August 18, 2008


The United States is still suffering the worst housing market downturn since the Great Depression, but a slew of factors suggest the worst may soon be over.

Among the strongest signs that the hard-hit sector could be recovering, home prices in many regions of the country are now falling at a slower rate, after two years of declines, and in some areas prices have actually risen.

The battered housing market is critical to the U.S. economy, with impact from the construction industry to the sale of appliances and furniture. After hurting growth in recent quarters, an improvement in the housing market could portend a turnaround for the world’s largest economy, which many say is either on the brink of a recession or already in one.

“Anybody who tells you they know when the housing market will bottom is delusional, but anybody who denies there are some positives out there that could make the housing market bottom fairly soon is equally delusional,” said Karl Case, the co-developer of a widely watched gauge of the housing industry and an economics professor at Wellesley College in Massachusetts.
The Standard and Poor’s S&P/Case-Shiller Home Price Indices, which Case co-developed, has shown a slowdown in the fall-off in home prices in recent months.

Other data also show signs of a bottom in house prices.

New housing starts fell to 975,000 in April from a peak of 2.27 million in January 2006. In the past 35 years, in the three other times that starts fell from more than 2 million to under 1 million, housing market activity rebounded within a quarter, Case said.

Residential construction as a percentage of real gross domestic product, however, is below the historical bottom, Case noted.

Case, whose research has focused on real estate markets and prices for over 20 years, said certain regions of the country now look similar to when they bottomed in past down cycles.

A bottom in the battered U.S. housing market may emerge first in California, one of the states hardest hit by foreclosures and where home prices are dropping to a point where the cost of a mortgage and taxes equals rent.

“The key is to try is to get some stability in the price of homes, which appears to be happening in California,” said veteran banking analyst Charles Peabody, of Portales Partners in New York.
And as goes California, the most populous state, so goes the rest of the United States, according to Peabody.

“California is the linchpin and so if the region flattens, that changes everything,” Case said.
Among the signs of a turn in the housing market, on a year-over-year basis, the S&P/Case-Shiller 20-City Composite Index was down 15.8 percent in May, but on a month-over-month basis home prices only fell 0.9 percent, the smallest monthly drop since September 2007.

And while on a year-over-year basis all 20 metro areas surveyed reported a decline in home prices, on a month-over-month basis home prices actually increased in eight metro areas in April and in seven metro areas in May. In March, only two metro areas showed prices rising month-over-month. (Reuters)