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Housing Has Already Reached the Inflection Point: McBride

By Bill McBride, guest columnist and author of the Calculated Risk blog.

Tuesday morning, S&P reported that the Case-Shiller Home Price composite indices "posted their lowest levels since the housing crisis began in mid-2006." The National Index is off 35.1% from the peak in Q2 2006, and the 20-city composite index is off about 35% from the peak in early 2006.

At first glance this seems like more of the same, with house prices continuing to decline. However, the March Case-Shiller index is released with a significant lag to current prices, and there are several signs that prices may already be at or near a bottom. Wednesday's report from the National Association of Realtors that pending home sales fell 5.5 percent in April does not change this view, as this is just one month of data.

First, it is important to understand that the March Case-Shiller index is actually a three-month average of sales closed in January, February and March. The purchase agreement for a house that closed in January was probably signed in November or early December, so some portion of the just released Case-Shiller index will be for contract prices six or even seven months ago. Usually this delay is not critical, but this means the Case-Shiller index will be slow to indicate the turning point for prices.

Have Prices Bottomed?

Other data suggest prices may have already bottomed. The CoreLogic repeat sales house price index showed prices increased in March and the Zillow House Price index indicated that prices also increased in April. Trulia has recently developed an asking price index that is adjusted both for the mix of homes listed for sale and for seasonal factors — and their analysis suggests prices have been up for three consecutive months through April.

Price fundamentals are improving, too. It is possible that prices could overshoot to the downside, and there are still a significant number of delinquent borrowers, but it appears prices in real terms (adjusted for inflation), and relative to rents, are back to normal levels. Here are graphs of real house prices and the price-to-rent ratio.

A key story over the past year has been the sharp decline in active listed inventory. The National Association of Realtors (NAR) recently reported that inventory was down 20.6% year-over-year in April. There are several reasons for this decline: sellers waiting for a better market; the NAR only reports "active listings" and there are quite a few "contingent short sale" listings — although contingent listings are down sharply too, the number of completed foreclosures listed for sale (known as lender Real Estate owned or REO) has declined due to the mortgage servicer issues, and a large number of low-end homes have been bought by investors as rentals reducing turnover. Overall this decline in inventory appears real, and lower levels of inventory put less downward pressure on prices.

Downside Risks

There are still downside risks, especially from the large number of properties with seriously delinquent mortgages. Lender Processing Services (LPS) recently estimated that 2 million properties are still in the foreclosure process and another 1.6 million borrowers are 90+ days delinquent. However, these properties are concentrated in a few states (mostly judicial foreclosure states with the exception of Nevada), and even with the mortgage servicer settlement, the resolution will take time since the courts are backlogged. So there probably won't be a "flood" of foreclosures in those states, just a steady stream.

Overall this suggests that house prices are back to normal, and prices are probably at or near the inflection point.

Bill McBride is the author of the Calculated Risk blog that he started in January 2005. He is best known for writing about the housing bubble and predicting the collapse in house prices. Previously Mr. McBride was a senior executive and on the board of directors of a small public company based in Orange County, California. Mr. McBride holds an MBA from the University of California, Irvine.