Has Housing Finally Bottomed?

In May, the S&P/Case-Shiller home price index exhibited its first monthly increase in nearly three years. In June, new home sales rose 11% -- besting the most optimistic forecasts. Existing home sales also rose during the month of June, for the third month in a row. As Karl Case, professor of economics and the co-creator of the S&P/Case-Shiller index, told Bloomberg radio: "If you're looking for a bottom, there's a lot of good stuff here."

Things do look better
A word of caution: the S&P/Case-Shiller index isn't seasonally adjusted, which makes it more difficult to interpret a month-on-month change in value. Year-on-year, the May figure still shows a substantial decline, but that decline continues to tighten, rather than widen:

Month

May 2009

April 2009

March 2009

Feb. 2009

Jan. 2009

Dec. 2008

Case-Shiller Index Year-on-Year Growth

(17.1%)

(18.1%)

(18.7%)

(18.7%)

(19.0%)

(18.6%)

At the beginning of the month, I wrote about a report that predicted that housing might not bottom until 2011. It's certainly conceivable that forecast was too pessimistic -- the new data appears to support a more optimistic outlook.

"All in" with housing
Investors in sectors with significant exposure to the housing market will surely take some cheer from this data, and it will be none too soon -- despite large stock price moves since the March 9 market low, the price-to-book multiples of the following stocks remain in their lowest decile going back to the beginning of 1995:

 

Primary Sector

Price-to-Book Value per Share

Lowe's (NYSE: LOW  )

Consumer Discretionary

1.76

Home Depot (NYSE: HD  )

Consumer Discretionary

2.40

Bed Bath & Beyond (Nasdaq: BBBY  )

Consumer Discretionary

2.93

Regions Financial (NYSE: RF  )

Financials

0.29

Bank of America (NYSE: BAC  )

Financials

0.48

Morgan Stanley (NYSE: MS  )

Financials

0.93

Wells Fargo (NYSE: WFC  )

Financials

1.31

Prepare for a long recovery
While the recent data is encouraging, there is no mathematical law that rules out future declines in home prices; i.e., we could have more than one bottom. In fact, in a piece published yesterday, my Foolish colleague Morgan Housel describes a phenomenon that could ultimately contribute to further price declines. Investors need to remain levelheaded and keep in mind the second half of professor Case's quote: "If you’re looking for a real recovery, it's going to take some time."

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Bed Bath & Beyond is a Motley Fool Stock Advisor pick. Bed Bath & Beyond, The Home Depot, and Lowe's Companies are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2009, at 10:36 AM, catoismymotor wrote:

    One of the local news broadcasts reported last night that for my area, Atlanta, home prices increased for the second month in a row. The number quoted was miniscule, like 0.03% or something. So here it appears that the market may have plateaued.

  • Report this Comment On July 29, 2009, at 2:10 PM, plange01 wrote:

    housing bottomed!! the US is barely 7 months into a depression.housing wont see a botom for 3-5 years! people in the US are still living in a dream world....

  • Report this Comment On July 29, 2009, at 3:18 PM, rijoker wrote:

    The summer months are always the time of the year that most people try to buy and sell. Now add the fact that the 8k tax credit for 1st time home buyers is going to expire Dec 1 and a lot of 1st time buyers want to take advantage before it expires. With that being said in order to get up to the 8k, you have to close before that date, which means you really need to be finding that property now.

    In San Diego the news keeps telling us that the prices are starting to creep up also. I am watching the prices, but I feel that it is a 8k stimulus and summer increase and feel that by november we will be seeing the increase turn the other way. Come fall/winter, prices will start to head the other way.

    I do not think it will be large swings, but just a slow steady decline until the summer time of 2010. Just my opinion!

  • Report this Comment On July 29, 2009, at 5:48 PM, nin4086 wrote:

    At least for the San Francisco Bay Area, the increase in number of sales and median prices is not a sign of any recovery. More expensive houses were a bigger portion of the sales and that drove up the median. I think this was due to two reasons:

    - People who care about schools move in summer. Houses near good schools are more expensive than others even though they have declined in price.

    - There are more prime mortgage defaults. So pricier houses are being sold (usually a prime borrower will buy a bigger more expensive home)

    We need to be careful when interpreting summary statistics like median house value.

    Of course, this article is more about number of sales. The only conclusion to be made from that data is that the housing market is price elastic and (still)seasonal. In summer more sales occur. When prices go down more sales occur (This does not contradict what I said above. Median prices are up but comparable houses are cheaper).

    If anyone wants to predict a bottom, he or she should look at unemployment data and other variables. Looking at housing data is backward and you cannot forecast based on that.

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