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Is the Housing Slump at the Bottom?
By: Brett Arends
Publication: The Wall Street Journal
Date: May 6, 2008
Is it time, at long last, to head down to Florida to start looking at homes?
Maybe.
And the above chart shows one reason why.
It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.
Of course, even if he's wrong we won't know for sure for many months.
But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession.
"It is really remarkable how much where we are today looks like the bottom we've had in the last three cycles," Mr. Case says. "Every time we've gone below a million starts, the market has cleared at that moment."
There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well.
"It's bottom-fishing time, I think," says Mr. Case. "There's got to be bargains in Florida, Arizona and Nevada."
Mr. Case isn't alone in his analysis. A hedge-fund manager made a similar case in Tuesday's dead-tree edition of the Journal. Bill Wheaton, legendary real estate professor at the Massachusetts Institute of Technology, was quoted here nearly two months ago suggesting some fears about the real estate crash were overdone.
And it was in January that I cited my favorite market source, a private portfolio manager in London, who said the homebuilding stocks on Wall Street were at last a buy.Those stocks have rallied more than 50% on average from that month's lows. Share price movements are often thought to anticipate events in the real economy by around six to nine months: If that is the case here, it would suggest actual real-estate prices will bottom sometime over the coming months.
Incidentally, contrarians will also love Tuesday's gloomy first quarter news from leading homebuilding D.R. Horton and from federally sponsored home loan giant Fannie Mae. Both announced massive losses following write-downs. Fannie is holding a $4 billion cash call and both slashed their dividends. You often see these kinds of capitulations at a market bottom, though of course you can see them on the way down as well.
It's important to note that real-estate prices in many areas are far from a historic bargain. Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.
First, there are too many other bargain hunters out there.
Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.
Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.
Finally, in an age of weak currencies and rising inflation, "real" or "hard" assets are in demand. That should include land, bricks and mortar. Sure, real estate isn't as cheap as it has been at other times in the past. But are Florida homes any more expensive these days than steel, or copper, or gold? I'm not so sure.(back to main Articles Page)
