Bottom, Bottom, Wherefore Art Thou, Bottom?

Written by: Steve Cook   Tue, April 7, 2009 Early Warning Signs, Market Analysis

Just as the darkest hour precedes the dawn, the bottom precedes the recovery.

Are we there yet? If not, when will the housing bottom come? How will we know when it arrives?

The Web is littered with predictions, forecasts, hunches and wild guesses about the long anticipated housing bottom, but only two things are certain. The first is that almost all of today’s bottom diviners will be wrong. The second is that no one will know for sure whether we have reached bottom of the real estate depression until it is past and we are into a period of recovery.

Yet we can still hope, pray, argue, and choose the prognosticator we prefer to believe.

Here are a few. Take your pick.

Ben Stein, writer, actor, TV personality, economist

“Home sales are rebounding, albeit from a very low level. In some areas, prices are stabilizing, although, again, from extremely diminished metrics. Are we hitting a housing bottom? Maybe, but I would not look for a major housing rally for some years to come. Housing busts tend to hit bottom, then scuttle along the seabed for a few years before truly rebounding. When we do see a rebound, there is no telling how strong it will be. (I am mindful of the tale of my parents’ house, a real beauty on a lovely street in suburban Silver Spring, Maryland. It cost my parents roughly $40,000 to build it in 1953. Twenty years later they sold it for about $77,000. Adjusted for inflation, they lost money. The same thing could happen again. There is no iron law that says real estate will always outpace inflation.)

(Stocks and Housing: Are They Putting in a Bottom?, April 6)

Diana Olick, CNBC real estate reporter

“So why am I slightly optimistic? Sentiment. Housing is largely driven by consumer sentiment; it is, after all, one of the most emotional (not to mention expensive) purchase for any individual or family. Buyers are definitely out, not just kicking the tires, but signing on the dotted line as well.

A few homes that were sitting around for months and months here in the DC area, suddenly sported “Under Contract” signs this weekend.

I’m also seeing rising inventory, which means discretionary sellers may be testing the waters as well.

I’m not saying it’s all over, because we’re far from that. Most experts I talk to say they don’t expect to see prices level off until 2010, but sales usually lead prices, at least they did on the way down.

The key will be foreclosures. If the Obama administration’s modification plan really shows some good numbers, and banks really put their money where their PR machines are, then the inventory numbers will start to come down.

That would be the truest sign of recovery in housing.”

(Reality Check, April 6)

MKM Partners, an institutional equity trading and research firm

“The Case-Shiller Home Price indexes continued to show rapid price declines in January. The CS 10-City Index fell 2.5% month over month in January and is down a record 19.4% from last year’s levels. Similarly, the CS 20-City Index fell 2.8% month over month in January and is down a record 18.97% year over year.

However, the steep declines in home prices along with a 200-basis-points decline in conforming mortgage rates from peak 2008 levels have combined to drive housing affordability to record levels.

We thus continue to believe home sales bottomed in January.”

(Barron’s Investor Soapbox, April 1)

Mark Zandi,

“Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight. Presuming we see strong action by policymakers to help support the economy and the housing market, prices will begin to recover by the end of this year.

Demand for new and existing homes began to fall in 2005, marking the end of a five-year U.S. housing boom fueled in part by easy credit for subprime borrowers.

U.S. home prices will fall another 11 percent on average before stabilizing, according to Moody’s The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.”

Quoted by Bloomberg February 9

Charles Delvalle, self-taught market-timing professional and value analyst who’s followed and invested in the market for the past ten years

“Unless we see a recovery in the housing market, we won’t really see a recovery in the economy.? But is the housing market approaching a bottom? Or does it still have a ways to go?

“In my parents’ neighborhood in Fort Lauderdale, Florida, homes that were selling for $250,000 during the peak are now going for $70,000 in foreclosure.

“Repeat this scenario across the country, and you’ll see that home prices still have further to go.

Making matters worse is the 8.1% U.S. unemployment rate and the fact that nobody can find credit to buy a home with. (Less credit means fewer mortgages.)

“As the year drags on and foreclosures keep hammering house prices, this trend will continue to drain cash from homebuilders.

“That means homebuilders such Lennar Corporation should continue to see lower share prices as the year wears on.”

(Where’s That Mythical Housing Bottom? March 9)

Alan Greenspan, former chairman of the Federal Reserve

SINGAPORE -(Dow Jones)- U.S. home prices are likely to reach a bottom by early next year when the market absorbs a buildup in inventories, clearing the way for a conclusion of the credit crisis sometime next year, former Federal Reserve Chairman Alan Greenspan told audiences in Asia Wednesday.

“We are having some liquidation now, it will accelerate, but it will not be until early 2009 that we will get close to having eliminated most of (the excess home inventory),” Greenspan said, according to a transcript of prepared remarks Deutsche Bank provided to investors.”

(Dow Jones, May 14, 2008)

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