US HOUSING - BULLISH BOTTOM FORMING PART II

Earlier this week we learned that this month’s existing home sales came in +6.5% higher than last month’s number (see post US Housing: Bullish Bottom Forming? - 1/26/09), and more importantly, inventories declined significantly. The supply of homes came down to 9.3 months, down significantly from the peak and the 11.2 months recorded in November 2008.

The second positive data point came yesterday. It was reported that the S&P/Case-Shiller 20-city index fell 18.2% year-over-year, the biggest drop since it began 2001. Less attention was paid to the fact that the October decline was 18.1%. Yes, it was the worst month on record, but the rate of deceleration continues to slow. On the margin, this is a positive. As we noted in our MEGA note, we believe that as we reach the spring, we will have reached the peak in declining home prices. Home prices will continue to decline but at a much lesser rate.

The bears point to the fact that home values will continue to decline contributing to what’s already been the biggest destruction of American household wealth in many generations. Consequently, the decline in home prices makes banks even more reluctant to offer mortgages. We know all this!

How many times have you heard everything has its price? Clearly, the decline in home prices is now leading buyers back into the market. At the same time, we are seeing a zero percent Fed funds rate, and an Obama administration focused on getting banks to lend to those seeking new lows in 30-year mortgage rates. The combination of significantly lower home prices and lower mortgage rates will have a positive impact on the US real estate market in 2009!

Howard Penney
Managing Director

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