Lately we've seen a lot of web searchers looking for answers to "when will the housing market turn around?" My gut reaction is, "you're looking for a bottom already?"
But to answer that question appropriately, we have to sift out what we mean by "housing market." Which part of the market do you care about? Are you a builder? A Realtor? A home buyer in an established neighborhood? A home seller in the exurb construction boom? Someone trying to hedge against a recession in 2007?
Altos Research deals primarily in the market conditions of existing homes, their prices, and their supply and demand. However, the housing market is much more vast than that. Much of the media coverage of the housing market focuses on new construction, and specifically the numbers of properties being built. So lets lay out the numbers to be tracked, and how they can be tracked:
| Market Measure | Source | What does the data say? |
| Existing Home Prices | Altos, Case-Shiller, OFHEO, NAR | Generally down, locally occasionally up. Likely under-reported. Lagging data, like OFHEO, still says up nationally, but that's several months old. |
| Existing Home Sales & Inventory | Altos, NAR | NAR sees uptick in October, calls market "stabilizing" |
| New Home Construction (Housing Starts) | Census Bureau | Way down. But looks like a long way to go.
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| New Home Sales | Census, NAHB | Down, but also under reported - down more than the numbers say. NAHB sees a bottom now. |
| New Home Prices | Census, NAHB | Generally flat for the year around $235,000. Curious uptick in October. |
So when does "the market" hit a bottom? The most bearish of these segments in our opinion is in new construction starts. Characterized by the frequently cited bubble factors boom, speculation, and (historically) large cyclical swings in both directions.
On the existing home front, the scenario we're favoring currently is the bore-em-to-death model. We see the economy as reasonably strong, not fragile, at least in the next 3 or so quarters. In the markets we measure, inventories are up over last year though starting their seasonal decline, days on market is up over last year, but we see no evidence of panic. Anecdotally, many, though not all, of our Realtor clients are seeing surprisingly strong Decembers. This combination implies that the marginal players (bad properties, part-time or newbie realtors, over-leveraged investors, etc.) get culled out not by a huge bubble burst but long term blahs (I can make payments, but I ain't makin any money). Maybe that takes several years before the cycle can begin anew. Ironically, this scenario helps both bulls and bears justify their positions. The strong get stronger, the weak get left for carrion.
The panic scenario kicks in when interest rates spike and recession hits. Those with the strongest bear position on the US economy for 2007 see residential construction as a primary driver. Can any one help us identify the scenario where the housing markets, prices or construction, surge? We can't see one on the horizon.
So when does the market turn around? Well the thing that both of these segments have in common is time. New construction typically takes over two years of decline. Given the strength of the past boom, maybe it takes double that this time.
We surmise that the searchers are typically home buyers who've read the housing bubble headlines and wondering if they should buy now or wait. The answer, as always, is "It Depends."
