Thursday, June 25, 2009

Where is the Housing Market Bottom?

Back on May 26th, I suggested that the housing market would bottom when the lines on the above graph met again. My basic premise was (is) that housing prices should not significantly outperform inflation over long periods of time. A home is a depreciating asset: there are constantly new homes being built and upkeep of a home tracks inflation.

Feel free to debate my choices of housing price index and inflation measure, but I don't think the conclusions would be materially different.

The model incorporates the growth rate of the indices since the housing market top in the middle of 2006. Holding the growth rates constant, home prices and inflation would meet in August of 2010. At that point, prices would be another 19.2% lower than the last reading (March, 2009). An instantaneous drop of 26.2% would do the same job. It is easy to see that dragging this out will have no benefit. The foreclosure moratoriums and shadow inventory are only delaying the inevitable.

At this point, it appears that we have seen the bottom in mortgage lending rates (see previous posts on mortgage payment levels & affordability). The graphs below track rates and spreads, measuring the absolute level of borrowing and the incremental return required for mortgage lending. Help on this front should not be expected.

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